Buoyed by signs of an economic recovery, Finance and Economy Minister Choi Sang-mok said, Thursday, he sees "rare signals of green light for the national economy." He was referring to Korea's economy growing 1.3 percent during the first three months of this year, the highest in 27 months. However, Choi might end up regretting his overly optimistic outlook in light of the formidable economic challenges facing the nation.

For starters, the U.S. economy has exhibited signs of stagflation, characterized by mounting inflationary pressure alongside an economic deceleration. According to data released, Friday, by the U.S. Department of Commerce, GDP growth in the first quarter of this year was only 1.6 percent, a notable decline from the 3.4 percent growth seen in the previous quarter. In contrast, personal consumption expenditure (PCE) soared 3.7 percent in the January to March period, a substantial increase from the 2.0 percent growth observed in the fourth quarter of 2023. PCE, excluding food and energy, stands as one of the most crucial inflationary indicators monitored by the U.S. Federal Reserve.

Negative factors include the strong dollar in the wake of stringent policies to curb consumer prices. On the other hand, the Joe Biden administration also adopted populist policies in the lead-up to the presidential election slated for November, relying on the issuance of government bonds.

This has caused the U.S. national debt to snowball to $1.695 trillion, accounting for 6.3 percent of GDP. Despite increasing concerns, however, the Biden administration is promoting pork-barrel measures like grants for semiconductor companies and waiving college tuition payments. The International Monetary Fund has identified the lax fiscal policy as a key contributor to rising inflationary pressure.

More economists are predicting the end of the "Goldilocks" period for the United States, characterized by a flourishing economy without significant price increase pressure. They caution against a potential "hard landing" scenario unless the underlying issues are addressed.

Furthermore, economic uncertainty is intensifying due to escalating conflicts in the Middle East. The World Bank has issued a warning about a potential energy shock if international oil prices reach the $100 per barrel range, which could prolong high interest rates into next year.

The potential economic sluggishness and high commodity prices in the U.S. will present a significant threat to the Korean economy, which relies heavily on external factors. This situation is particularly concerning given Korea's existing challenges stemming from the so-called "three highs": consumer price, interest rate, and foreign exchange rate. High interest rates initiated by the Fed will likely exacerbate fluctuations in the local financial markets.

In Korea, the bank loan default rate rose to 0.51 percent in February, marking the highest level in 57 months and indicating an increased vulnerability of banks to non-performing loans. Commercial banks are also exposed to a potential time bomb in the form of project financing amounting to 111 trillion won ($80.4 billion). The anticipated economic slowdown in the U.S. is likely to dampen Korea's thriving exports, despite recent signs of recovery driven by strong semiconductor sales to the U.S. market. The U.S. currently represents 18.9 percent of Korea's total overseas shipments.

The current surge in sales of high-bandwidth memory chips used for artificial intelligence (AI) technologies has significantly driven Korea's exports. However, the sustainability of this positive trend is uncertain. There are growing concerns about a potential contraction in the global semiconductor industry.

Taiwanese chipmaker TSMC, a key supplier of AI chips to Nvidia, recently lowered its growth target by half due to expectations of lackluster market conditions. Adding to the challenges in global markets, China has intensified efforts to export excess products in sectors like petrochemicals and steel at discounted prices. This aggressive approach from China could further impact market prospects globally.

Uncertainties stemming from conflicts in the Middle East could result in higher oil prices and potential disruptions in the global food supply system, exacerbated by the worsening climate crisis. Specifically, Korea's construction sector is grappling with soaring costs, including labor expenses. Against this backdrop, more construction companies are hesitating to undertake new apartment building projects. The sluggishness of the construction sector is particularly concerning, because of its broad impact on Korea's overall economy.

The Bank of Korea issued a press release on Thursday, attributing the increased exports of IT products, such as chips and mobile phones, as the driving force behind economic growth. In response to this data, the ministry indicated a proactive stance, suggesting the possibility of revising the economic growth estimate to over 2.3 percent for this year.

However, the ministry must acknowledge that this optimistic outlook has yet to be felt by the general population. For example, persistently high consumer prices show no signs of easing. It is imperative for the Yoon Suk Yeol administration to take every possible measure to prepare for looming external challenges, such as the economic downturn in the U.S. and ongoing conflicts in the Middle East and Ukraine, while also addressing critical domestic issues. Baseless optimism will not be beneficial in this context.