Bracing for a perfect storm

Lee Jong-wha
The author, former chief economist at the Asian Development Bank and a senior adviser for international economic affairs to former President Lee Myung-bak, is a professor of economics at Korea University.

Can the South Korean economy survive this year? The Bank of Korea has projected growth in this year’s gross domestic product (GDP) at 3.0 percent and inflation at 3.1 percent. It expects Korea’s growth to stay stable following a global economic recovery and eased quarantine rules.

But the outlook for this year’s economy was foggy even before the Russian invasion of Ukraine. Growth will likely be slower and prices higher than the central bank projected due to multiple factors at home and abroad. People’s lives could get harder. A slowed economy won’t add jobs, not to mention increases in wages or corporate profits. Higher living costs could hurt economic growth.

The Korean economy could become hit by a perfect storm — a crisis born of a rare confluence of factors. Already-high international oil and gas prices have shot up after Russia’s invasion. The U.S. Federal Reserve is expected to lift interest rates by more than 1 percentage points to help contain inflation.

The International Monetary Fund (IMF) lowered its expectation for global economic growth to 4.4 percent in January from 4.9 percent projected in October. At this rate, even 4 percent growth may not be easy. Worsening developments related to the Ukraine crisis, faster interest rate hikes in the U.S., the spread of the Omicron variant of Covid-19, and a slowed Chinese economy could create a perfect storm to seriously damage the global economy. The geopolitical climate around Korea is also perilous with tensions between America and China and North Korea’s continued missile provocations.

South Korea is always susceptible to external shocks. It heavily relies on imported raw materials. Its financial markets are open, which makes them vulnerable. As a result, it suffered from every major external crisis — two oil shocks, the 1997-98 Asian financial crisis, the 2007-08 global financial meltdown, and the Covid-19 pandemic. The economy contracted 1.6 percent in 1980, 5.1 percent in 1998, and grew just 0.8 percent in 2009. It retreated by 0.9 percent in 2020, the first year of the pandemic. Inflation also was high during times of high energy and commodity prices. Inflation soared to 19 percent in 1980 after the oil shock and to 7.5 percent in 1998 due to the Asian financial crisis.

This year, the shocks may not be as grave as in the past. But if external events are coupled with internal weaknesses and poor government responses, they could cause catastrophic consequences. As Covid-19 infections and critically-ill patients rapidly increase in Korea, a return to normal lives can be delayed, preventing any recovery in consumer and corporate spending. There are concerns about the possibility of public policies not being well-planned and executed particularly during the transition period from one adminisration to the next and in the early stage of a new administration. It is also unclear if the new president and administration will be able to manage to maintain stable economic growth in such a tumultuous climate.

The outlook for the Korean economy is also grim in the longer run. Korea’s fertility rate is the world’s lowest at 0.81 and the population is aging fast. A thinning working population and stagnated productivity will lower our growth potential. That’s not all. Household and government debts are at record highs. Household debt exceeded disposable income by 174 percent last September and the government’s debt-to-GDP ratio rose to 51 percent from 41 percent over the last five years, according to IMF data. The private sector has lost vitality while the government’s fiscal situation has worsened. According to a survey by the Korean Economic Association (KEA), a majority of economists forecast Korea’s growth rate to drop to the 1 percent range in five years.

The people and government must be vigilant and keep their eyes open. If blind optimism gets in the way of readiness and places the economy at the mercy of a perfect storm, Korea could fall into a lengthy slump like Japan. If the country fails to detect looming danger like the frog in the boiling water, it can hardly rebound.

We must fight for our future. Korea survived past crises better than many other countries through concerted efforts by the people and the government. The government must take preemptive actions to remove the dangers and find a clever mix in fiscal, monetary, financial and industrial policies. Then the economy can sail smoothly. The government under a new president in May must have a capable economic team that can draw up effective policies to weather the storm.
Translation by the Korea JoongAng Daily staff.