DBD the new bogeyman of economic buzzwords

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DBD the new bogeyman of economic buzzwords

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While the government has been trying to put a positive spin on the worsening economic conditions at home and abroad, fears of so-called “debt-based deflation” have begun to sweep the nation.

In other words, the government may be winning its war against giddily escalating consumer prices - but only because consumers are too indebted to spend.

After the Bank of Korea belatedly downgraded Korea’s benchmark interest rate last week and its growth forecast for 2012 - both to 3 percent - a foreign investment bank warned that actual growth may be far lower than hitherto predicted.

Yesterday, Bank of America Merrill Lynch lowered its forecast for the Korean economy to 1.8 percent for this year, arguing that the euro zone debt crisis and slowdown in China threaten to put a bigger dent in Korea’s export-driven economy.

JP Morgan Chase and UBS have growth outlooks for the Korean economy in the 2 percent rage.

The government’s economic control tower has been moving slowly to boost the market in the first six months of the year, based on its belief that a slowdown in the first half would be followed by a slight rebound in H2 and momentum builds.

Minister of Strategy and Finance Bahk Jae-wan, who was on a short summer vacation until yesterday, has not shed his firm belief in the government’s economic policy direction, saying, “the economy may start to grow later than we originally expected, but our basic premise is correct and there is no change in our policy.”

But the domestic market is not showing signs of improvement, fuelling concerns of debt-based deflation.

Although consumer prices have stopped skyrocketing, consumers remain unwilling to loosen their purse strings, and businesses are investing conservatively, leaving the domestic market in a frozen state. At the same time, household debt is mounting and the real estate market is stagnating.

As a result, GDP growth slowed to 2.7 percent in the first half.

“When asset prices fall, people become unable to repay their debts, intensifying deflation and low growth,” said Yim Hee-jeong, a researcher at Hyundai Economic Research Institute.

What is worse is that the country’s exports, its main growth driver, are in decline due to a contraction in global demand, led by the United States, the EU and China.

According to the Korea Customs Service, the trade balance excluding auto exports recorded a deficit of $212 million for the first half.

Confirming the prevailing winds of negative sentiment, the International Monetary Fund said in a report Monday that “rising global uncertainty and weaker external demand are causing headwinds for export-dependent economies such as South Korea.”

Economic pundits say the government has missed a grand opportunity to start applying stimulus packages. Instead, they say, it wasted six months harping on about how the domestic economy is doing well based on its strong fundamentals.

“It seems as though the government is bracing itself for a worst-case scenario,” said Ju Won, a researcher at Hyundai Economic Research Institute.


By Song Su-hyun [ssh@joongang.co.kr]

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