The edge of a cliff

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The edge of a cliff

The Korean economy is sinking deeper and deeper into a pit. Industrial activity picks up on investment. Output must increase to generate growth in workers’ wages and consumption. Increased demand makes companies invest and produce more to put the economy on a benign cycle. This is how an economy grows. The latest data points to an economy caught up in a vicious rather than a virtuous circle. All the data on the domestic economy — investment, jobs and consumer sentiment — suggests the start of a recession. The government alone has its head in the sand and cries out that the economy is doing well to defend its policy direction.

In July, industrial facility investment fell 0.6 percent against the previous month to extend a downturn for the fifth month in a row — the longest slump since the financial crisis of the late ‘90s.

Factory output and consumption stayed stagnant. Output of manufacturing and services added 0.5 percent on month, slightly improved from 0.7 percent in June but nevertheless stuck in the zero territory. Retail sales gained a mere 0.5 percent.

Business indicators painted a grimmer picture. The coincident index reflecting present economic activities fell 0.3 point to 99.1 to extend losses for the fourth month in a row. The leading indicator retreated 0.2 points to 99.8. A reading under 100 means industrial production is below its long-term level to imply a negative output gap.

Against the negative backdrop, the Bank of Korea (BOK) kept the policy rate unchanged from the last hike in November last year even as the U.S. central bank is about to deliver more increases due to fast recovery. Despite the risk of triggering capital flight, the BOK had to stay put on rates for fear of hurting the fragile economy. Cheap rates have channeled 1,116 trillion won ($1 trillion) of fluid liquidity into the real estate market to fuel overheating.

With monetary policy in a bind, the government has turned more aggressive in fiscal expansion. It has come up with a new record budget size of 470.5 trillion won for next year, up 9.7 percent from this year. The government is out to stretch fiscal spending even as 54 trillion won over the last two years has helped little to improve job conditions. Fiscal actions cannot ensure sustainability in job and economic growth.

Companies make jobs and revitalize the economy. The private sector can boost corporate spending. The first handpicked deregulation action from President Moon Jae-in to allow more investment in online-only banks has hit a wall.

Kim Kwang-doo, vice chairman of the National Economic Advisory Council proposed moderation in economic policy. He raised alarm about the economy sinking into a slump in May, but the government ignored the warning from the top adviser. Policy steering must change to prevent the economy from falling off a cliff. The economy could be swept off if it does not break free from the income-led growth ideology now.

JoongAng Sunday, Sept. 1, Page 34
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