Economic reality hits Korea

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Published: 13 Oct. 2022, 19:53 Updated: 17 Oct. 2022, 12:45

Economic reality hits Korea

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 and president of the Korean Economic Association.

The global economy has the chill. The wintry season will be accompanied by a recession to cause pain for households and companies. In its latest outlook, the International Monetary Fund (IMF) forecast the global economic growth next year will be 2.7 percent, slowing from this year's 3.2 percent. It estimated growth of 1.0 percent for the United States, 0.5 percent for the euro zone, 4.4 percent for China and 1.6 percent for Japan. One third of the global economy will suffer contraction for two consecutive quarters, it warned, adding, "The worst is yet to come, and for many people, 2023 will feel like a recession."

When an economy contracts for two straight quarters, it is technically in recession. Emerging economies can be judged to be in recession when the economy falls below the normal levels, since their growth potential is greater than for developed economies. For the global economy, growth of 2 percent or less is deemed to be recession.

The global economy experienced recessions in 1975 and 1982 from the oil shock, in 2009 from the global financial crisis, and in 2020 from the Covid-19 pandemic. Many countries and the world economy may face another economic slump next year. The IMF predicts a 25 percent probability of global growth falling below 2 percent in 2023. The World Bank predicts global growth could fall under 1 percent next year if central banks continue to raise interest rates. It warned that many emerging economies could face depression and financial crisis.
The U.S. too is headed for a recession. The Federal Reserve will have to keep on lifting the benchmark rates until the personal consumption expenditure (PCE) price index, currently above 6 percent, comes down to its inflation target of 2 percent. The Fed is expected to bump up the key rate by 150 basis points over the next three meetings in November, December and January. The fast monetary tightening will certainly dampen consumer and corporate spending and spike unemployment. But the central bank cannot slow tightening as energy prices and wage pressure remain strong.In Europe, the cost of living has shot up and economic activity has become depressed from the energy crisis. It cannot easily find a solution. Since the European Central Bank will have to keep raising interest rates due to runaway prices, demand will continue to sag. Governments cannot afford stimuli due to heavy debt from their hefty spending during the pandemic. The European economy could face a serious depression unless the Ukraine war ends soon to normalize gas supplies from Russia.The Chinese economy has been slowing, too. Even if Beijing ends its zero-Covid-19 policy, the economy is unlikely to perform as in the past due to the sluggish real estate market, subdued exports and unceasing conflict with the U.S. China galloped at an average annual growth rate of 7.3 percent from 2012 to 2021 after the global financial crisis. The economy, the world's second largest, helped drive the global economy. Its growth for the mid-term will likely be in the 4 percent range. Its slowdown cuts into growth of neighboring countries. According the IMF's study, if China's growth falls by 3 percentage points, growth of neighboring countries dips by 0.5 to 1 percentage points.The Korean economy will inevitably feel the freeze when the three global engines — the U.S., Europe and China — lose steam. In dollar value, the U.S. economy makes up 24 percent of the global economy, the EU 21 percent and China 15 percent. When the three economic zones, responsible for 60 percent of the global economic activity, sink at the same time, a slump is inevitable. The World Trade Organization forecast that global trade would only grow 1 percent next year. Exports account for 42 percent of Korea's GDP. After mainstay chip exports and other shipments to China contracted, the balance of goods turned to a deficit in July for the first time since the global financial crisis.The Korean economy also cannot avoid recession when exports fall along with a slump in domestic demand and real estate market. The IMF forecasts Korea's growth at 2 percent in 2023. Nomura Research Institute projects Korea's growth could be 0.2 percent in 2023 because its economy is sliding the fastest among Asian countries from the impact of soaring interest rates on the colossal private-sector debt.An economic crisis is looming. Korea cannot avoid it if the world cannot shake out of the financial instability and recession. The coming crisis may not be as grave as the crises in 1997 and 2008 and pandemic woes, but the government must not let its guard down. If actions are slow against the blow on internal weaknesses from external shocks, the country would find itself in a perfect storm. The government must study the impact of global insecurities on local industry and economy and examine the weaknesses. It must come up with comprehensive measures against rising prices and financial market instability and promote exports and employment. Lower income household will be hardest hit by strong inflation and recession. Authorities must find specific measures to help ease their deepening pain.Translation by the Korea JoongAng Daily staff.