An economic emergency

The economy has shown signs of retreat under the weight of strong prices. According to industrial data released by Statistics Korea on Friday, Korea’s industrial output fell by 0.7 percent, retail sales — a barometer for consumer spending — by 0.2 percent, and corporate investment by 7.5 percent from the previous month. It is the first time for the country’s output, consumption and capital investment to contract in sync since February 2020. The coincident index reflecting current business cycle has dropped for two straight months and the leading index suggesting business outlook also has been declining for 10 consecutive months. The data raises deep concerns for an economy in downturn since the outbreak of the pandemic in 2020.

The government finds the data mixed with both upside and downside factors due to uncertainties. Despite a return to normalcy from Covid-19 restrictions, domestic consumption has not picked up due to a drastic surge in prices. Subsidies for small merchants from the government’s second budgetary increase and large corporations’ promises to invest more than before, and the news about a lifting of China’s lockdowns provide the upside. But the Ukraine crisis and high oil prices continue. Gasoline prices have risen for three weeks after a brief easing from the government’s fuel tax cut after international oil prices hit new record levels.

Strong oil prices can harden not just consumers, but the economy as well. State-invested think tank Korea Institute for Industrial Economics and Trade projected that the country’s trade deficit will reach $15.8 billion this year — larger than the $13.3 billion in red in 2008 from the global financial crisis from the Wall Street meltdown — due to spikes in oil and other commodity prices.

Monthly rents have also come to exceed long-term jeonse leases in residential rent market in April for the first time since the government has been compiling the data from 2011. Housing conditions have worsened due to the so-called Tenants Act pushed by the Moon Jae-in administration. That’s not all. The rate for household loans averages above 4 percent — the highest in eight years — after the rate hikes. As a result, financial burden has increased for those who had borrowed money from banks for housing and stock purchases.

The People Power Party (PPP) leadership has vowed to drop a “budget bombshell” despite all the danger from inflation on the economy. The second supplementary budget could further add to inflationary pressure, yet the PPP vowed to influence the government to increase spending to win the local elections. Budget promises from a political party can undermine the finance ministry. And yet Finance Minister Choo Kyung-ho remains mum.