Hurtling toward catastrophe

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Hurtling toward catastrophe

The state of the Korean economy is worsening at a pace that is baffling policymakers. Bank of Korea Governor Lee Ju-yeol during a press conference over the weekend said the central bank may have to downgrade this year’s growth and inflation estimates. The bank three months ago cut this year’s growth estimate to 2.9 percent from 3.0 percent.

Facility investment in August fell for the sixth consecutive month, the longest slump since the near-default crisis 20 years ago. Job additions that averaged 300,000 last year stopped at 3,000 in August. The government indicated that job numbers could contract against a year-ago in September. The external environment has worsened. The United States and China continue to play chicken over trade. Oil prices are on an upward spiral. Private institutions predict growth will slow next year.

Interest rates should drop to stimulate demand, but that goes against the global trend. The U.S. central bank has raised its policy rate target three times already this year, putting it 75 basis points higher than the Korea benchmark rate of 1.50 percent at the upper end, and indicated another hike by the end of the year. A bigger gap could persuade foreign capital to pull out of Korean assets en masse and rock the markets. Over the last five days, foreigners net-sold 1.7 trillion won ($1.5 billion) of Korean stocks. Raising the rate also is not easy as it could hurt self-employed people sitting on a 600 trillion won pile of debt.

Government officials — including the prime minister and land minister — and ruling party leader have been demanding the central bank raise interest rates to rein in housing prices. But economic conditions are too fragile to accommodate higher rates to address problems in the real estate market.

To normalize the Korea rate policy, companies should have been inspired to capitalize on cheap borrowing rates. The Korean economy has retreated because big companies have been discouraged from investing due to heavy layers of regulation blocking new industries, while rises in labor costs due to pro-labor policies have made things worse.

The Korean economy could fall deeper into decades of slow growth or recession at such a rate. The policy direction must change immediately to promote productivity. Regulations should be lifted and the labor market must become flexible. President Moon Jae-in said the government should assist companies to invest and make good jobs. Policymakers must comply with actions to normalize growth.

JoongAng Ilbo, Oct. 8, Page 30
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