Challenges to economy are worst since the late 1990s

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Challenges to economy are worst since the late 1990s

It’s been nearly two decades since Korea faced its worst economic crisis. Companies went bankrupt, stock markets plummeted and households dug out gold from their safe deposit boxes for the government to restore its foreign exchange reserves.

Since then, Korea has become a technologically advanced industrial powerhouse in smartphones and automobiles and the Korean brand has never been more valuable.

But now it faces economic hardships that mirror the bad days of 1997. The government lowered its yearly growth outlook below 3 percent for the first time since 1999. Jobs are expected to shrink amid weakening domestic market. Companies are expected to slash investments and spending.

A vicious downward cycle seems to be settling in.

This year the government expects 260,000 new hires for the workforce, down from 290,000 last year. This will reduce Korea’s overall employment rate to 66 percent from 66.5 percent while raising the regular unemployment rate from 3.8 percent to 3.9 percent.

That employment trend has been gaining momentum since the third quarter of 2016, when newly hired employees shrunk 2.2 percent compared to the same period a year earlier.

The shipbuilding industry, which has been laying off employees in a so-called restructuring since last year, is expected to cut more this year.

Self-employed businesses are already facing gloom as consumers cut spending and competition grows. According to a report by the Bank of Korea, loans borrowed by self-employed businesspeople increased by roughly 70 trillion won ($58.1 billion), or 18 percent, compared to the first half of 2015 to reach 464.5 trillion won at the end of the third quarter 2016. They’re borrowing more but not making more: 21 percent of self-employed businessmen make less than 1 million won a month in revenues. If interest rates start to rise, many will not be able to pay off their loans and could be forced out of business.

The LG Economic Research Institute has projected this year’s gross national income per capita to increase in the 1 percent range. Gross national income per capita grew roughly 3 percent last year.

The government announced aggressive spending, including frontloading 20 trillion won of its budget in the first quarter of this year.

But analysts say that is not enough.

“Because [last year] the government already used measures like lowering consumption taxes [to encourage spending], the only short-term policy that it can rely on is injecting government budget,” said Ju Won, a Hyundai Research Institute economist. “However, they need to be more aggressive.”

But not all indicators are equally depressing. Exports, the lifeblood of Korea’s economy, are showing signs of improvements.

In fact, the place that Finance Minister Yoo Il-ho visited on the first day of 2017 was a new port in Incheon where Korean goods are shipped from.

At the port, the finance minster noted that he expects exports to turn around for the first time in three years.

“We plan on focusing our policies so that the recovery of exports could speed up,” Yoo said.

According to the Ministry of Trade, Industry and Energy on Sunday, exports in December rose 6.4 percent year-on-year. This was the second consecutive month that exports, which have been on a decline since January 2015, have seen year-on-year growth.

Although exports in 2016 overall reported a 5.9 percent decline to $495.5 billion — thanks to sluggish global demand, an automotive industry strike and the Samsung Electronics’ Galaxy Note7 recall — the government is expecting a turnaround this year.

The government projects this year’s exports will expand 2.9 percent on the back of increased exports of cosmetics and medical drugs and as the global economy is expected to improve.

BY LEE HO-JEONG [lee.hojeong@joongang.co.kr]

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