Reenergizing the economyInflation has shot above 5 percent in Korea as previously warned by the government and central bank. According to Statistics Korea, the consumer price index (CPI) in May rose 5.4 percent from a year-ago period. The gain is the steepest in 13 years and nine months. Petroleum-related prices jumped 34.8 percent and livestock prices 12.1 percent due to the jump in international oil and grain prices. Prices of flour soared 26 percent, cooking oil 22.7 percent, and potatoes 32.1 percent, hardening the lives of consumers.
Headline price levels are expected to remain above 5 percent for some time. International petroleum and other commodity prices remain volatile. After Covid-19 restrictions were lifted, demand also increased. The government’s supplementary budget of over 62 trillion won ($51.9 billion) and various campaign promises by local government heads could add to inflationary pressure.
President Yoon Suk-yeol said that as an economic typhoon has arrived on our backyard, he could not share the joy over the People Power Party (PPP)’s landslide victory in the June 1 local elections. “The windows to our house and trees are shaking. This is no time to speak of a political triumph of a party,” he said.
Yoon is not exaggerating. The country must endure high prices, high interest rates and high U.S. dollar-won exchange rate. Instead of excessive government intervention, authorities must try to ease bottlenecks in distribution so as not to interfere with the market mechanism. Deputy Prime Minister for Economic Affairs Choo Kyung-ho asked companies to do their best to raise productivity and contain production cost increases and spillover to consume prices.
In the longer run, Korea’s economic growth potential will likely weaken. The growth engine has lost steam. Bank of Korea Governor Rhee Chang-yong warned of “secular stagnation” for countries like Korea faced with a rapidly aging population.
Prices and interest rates will stay high for the time being while our economic growth slows. Economic participants must beware of the crisis. Even when prices stabilize, the country must find a new growth engine and restructure the economy by changing its fundamentals.
The economy has been pushed to the sidelines due to the March 9 presidential election and the June 1 local elections. Reckless campaign promises from candidates poured out during the campaign. Fortunately, there is no major elections until the next parliamentary election in April 2024. President Yoon must push for pension, labor and education reforms, as well as lift regulations and reform tax code, as he promised in his campaign. There should not be ruling and opposition parties in the effort to save the economy from a typhoon.