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Economic gloom persists

Published: 04 Mar. 2015, 22:34

The Korean economy is fast losing vitality and slipping further from recovery. The consumer price index grew a mere 0.52 percent year-on-year in February. It was the third straight month that inflation has been mired below 1 percent. Excluding 0.58 percent growth from tobacco price hikes, consumer prices fell 0.06 percent. The country has never experienced a price fall, but we need to face up to the totally new reality that we may be looking at deflation — a drop in prices during a time of economic stagnation.

Consumer prices were depressed over the past few months due to a fall in oil prices and agricultural products. But even putting temporary factors aside, prices have fallen due to lackluster demand during the protracted economic slowdown.

Other data point to stagnation. Manufacturing, non-manufacturing, investment and trade all decreased in January. Companies have begun to reduce manufacturing and investment, and households are tightening their belts. In addition, both exports and imports plunged, raising concerns about trade, which has been one of the primary supports for the economy. The trade numbers will likely shrivel further due to reduced costs and demand.

Fortunately, the stock and real estate markets have picked up thanks to an injection of liquidity and deregulation from the government. But the rebound won’t be sustained without support from the economy itself. If the gap between the real economy and asset markets widens, bubbles can build up and later burst.

The economy needs immediate resurrection. If it deteriorates further, its revival could be even more difficult. The government won’t be able to push ahead with structural reforms if the economy is too feeble. The Park Geun-hye administration must determine if it has more policy weapons in its arsenal to boost investment and consumption. More is required than deregulation. Instead of arguing whether deflation is possible, it must make sure that eventuality doesn’t happen.