Long-term steps needed to galvanize economy
Korea is waging an uphill battle to tame soaring inflation and ensure solid economic growth. Yet the country is finding it more difficult to maintain sustainable growth as economic conditions continue to deteriorate. The new Yoon Suk-yeol administration should work out comprehensive long-term measures to avoid downside risks and regain economic vitality.
Fighting inflation is one of the most daunting tasks facing the country. Consumer prices surged 5.4 percent year-on-year last month, hitting the highest level since August 2008, according to Statistics Korea. The figure was up from 4.8 percent in April. The runaway inflation was attributed to high energy and food prices amid the prolonged Russian invasion of Ukraine and global supply chain disruptions.
Higher interest rates and the depreciation of the Korean won against the U.S. dollar are adding fuel to the fire. The Bank of Korea (BOK) raised its key policy rate by 25 basis points to 1.75 percent in May, the fifth rate increase since last August. This move was inevitable to bring inflation under control. But the rate hike is increasing the interest payment burden on borrowers, particularly underpaid workers and small businesses. Therefore, financial authorities need to take proper steps to help debtors ease their financial straits.
More seriously, there are growing fears about stagflation, a term describing a simultaneous phenomenon of economic stagnation and higher inflation. The Korean economy is losing steam amid mounting inflationary pressure. Industrial output, consumption and investment all declined in April for the first time in more than two years. The economic prospects are getting worse, making it even trickier to return to pre-pandemic life. The BOK lowered its 2022 economic growth outlook to 2.7 percent from 3 percent. Moody's Investors Service even cut Korea's growth projection to 2.5 percent from 2.7 percent.
What is at stake now is how to get the economy rolling again. For starters, all economic players must have a sense of crisis. BOK Governor Rhee Chang-yong said the central bank is more concerned about inflation than economic growth, hinting at further rate hikes. So it is hard to expect a quick economic recovery with no end to the inflationary spiral in sight. A day after the ruling People Power Party (PPP) won a landslide victory in the June 1 local elections, President Yoon warned against looming economic woes.
First of all, the Yoon government should concentrate on boosting the country's growth potential to ensure sustainable economic growth. To this end, policymakers need to push for structural reforms to improve our productivity and competitiveness. It is also important to find new growth engines to maintain growth momentum by promoting deregulation, innovation and entrepreneurship. The rival political parties should stop their partisan struggles and opt out of populism to join together for efforts to revive the economy.