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New engines crucial to ensure sustainable growth
By Lee Kyung-min
The Korean economy has entered the era of the so-called new normal, with "three lows" ― low growth, low interest rate and low inflation ― becoming a reality, a rather bleak combination of economic conditions already in progress in many advanced countries, analysts said Monday. The much-feared economic conditions are fast becoming a reality after consumer prices dropped in August, the first time in the 54 years that statistics authorities have been compiling relevant data.
According to Statistics Korea, the Consumer Price Index (CPI) stood at 104.81 in August, down 0.04 percent from 104.85 a year earlier.
The decline came after the growth rate had stayed below the 1 percent threshold for eight consecutive months since January.
According to the Bank of Korea (BOK), the country's gross domestic product (GDP) grew 1 percent in the second quarter of 2019 from three months earlier following a "shocking" 0.4 percent contraction in the first quarter.
A major point of concern was the second-quarter GDP deflator decreased 0.7 percent from a year ago, the worst since the first quarter of 2006. The figures have been declining since the fourth quarter of 2018.
The GDP deflator, calculated by dividing nominal GDP by real GDP and then multiplying by 100, represents the extent of price level changes.
Only about two months after the 25-basis-point key rate cut on July 18, the BOK is under increasing pressure to lower the key rate in October amid fast-deteriorating economic developments.
"This really is becoming the new normal," said Hong Sung-il, head of economic policy team at Korea Economic Research Institute (KERI).
KERI is supervised by the Federation of Korean Industries (FKI), the largest business lobby comprising the nation's major conglomerates.
"The world economies began to experience the situation long before we did. What was long considered going against the international norms has now become a reality," he said.
"Shipbuilding and shipping, the two pillar industries that led the country's growth, fast deteriorated four or five years ago. And fast-rising China is closely catching up with us, further threatening Korea's industrial competitiveness," Hong said.
He pointed out that businesses are reluctant to hire, leading to little improvement in the unemployment rate. People earning less are not inclined to spend, and this weakens consumption further.
"This continued downward spiral could accelerate in the coming months. While it is not yet a full-blown deflation ― a decline in the general prices of goods and services ― it bears closer monitoring given the spiral continued for about two years after the Asian financial crisis in the 1990s," he added.
Korea particularly vulnerable
While the idea of this "new normal" is seemingly being embraced by advanced economies, indicated by recent remarks from New York Federal Reserve President John Williams, Korea does not have as much room to maneuver as the U.S., given a slew of woeful economic indices.
During a speech to the Economic Club of New York on March 6, Williams said the U.S economy is heading into a "new normal" of slower growth citing three constraining factors: a global slowdown, geopolitical uncertainty and tighter financial conditions.
"Now, I know this talk of slowing growth is causing uncertainty, some hand-wringing and even fear of recession. But slower growth shouldn't necessarily come as a surprise," Williams said.
The situation for Korea, however, is not as rosy as the U.S., according to Yun Chang-hyun, an economist at the University of Seoul.
"The unemployment rate remains considerably high with the self-employed in their 40s and 50s fast disappearing. Korea's exports have been in decline for the past few months due to the U.S.-China feud and Korea-Japan dispute. Korea, without a strong domestic consumption or flexible labor market, stands more vulnerable to external shocks," Yun said.
What to do?
The economy is bound to take a further beating unless the government allocates its budget where it duly needs, according to Hyundai Research Institute (HRI) senior economist Ju Won.
"Drawing up a supplementary budget will be meaningless if it is allocated for the improvement of social benefits and not for measures to help revive the sluggish corporate sector," Ju said.
"The economy will become less vulnerable to negative developments in the domestic and global markets, if ― and only if ― the budget is allocated to areas that could bolster growth."
Helping businesses in the traditional pillar industries become more high-tech, thereby boosting high-quality, high-value creation should be among the top priorities of the current administration, Ju noted.
"The government should help not only the chipmaking industry, but also traditional manufacturing ― shipbuilding, automotive and steel industries ― to become more competent, a measure that will help the country brace for what is likely to be a long, hard period of slowdown," he said.
KERI Industrial Innovation team head Lee Sang-ho said boosting these sectors with a long-term plan will help them compete on the global stage.
"We cannot lead the changes in the global market due to clear limitations concerning technological advancement and scale. What Korean firms can do is to be a fast follower to promptly narrow the gap between the global leading innovators and domestic firms," Lee said.
The business environment should therefore become more conducive to innovation, creative destruction and productive mergers as corporate entities most deem fit, Lee stressed.
"Businesses should be allowed to exercise discretion to best manage factors of production involving labor, capital and natural resources. The current regulations do more harm than good for businesses seeking profits," Lee said.
