[Column] R is for recession

Kim Chang-gyu

The author is the economic news editor at the JoongAng Ilbo.

Every year on Nov. 11, China goes on a massive shopping spree for Singles Day.

E-commerce giants like Alibaba post a running sales count. The shopping extravaganza ended at midnight, but e-commerce players were unable to publicly celebrate their sales figures for the first time in 14 years. Consumer spending has been rapidly shriveling. According to China’s National Bureau of Statistics on Dec. 15, retail sales fell by 5.9 percent in November from a year ago. Retail sales contracted 6.7 percent in May after the full-scale lockdown in Shanghai. They turned positive in June, but the reading returned to the negative from October.

Amid the rapidly sinking economy, Beijing has eased some of its rigid zero-Covid-19 policy that it has sustained for three years. Many experts expect the world’s second largest economy to fail to meet the government’s 5.5 percent growth target this year, and instead manage a growth of around 3 percent, more than half last year’s 8.1 percent. Economic activities will pick up from eased restrictions and lockdowns, but output and consumption will likely be weighed down by the spread of the virus.

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International Monetary Fund (IMF) Managing Director Kristalina Georgieva projected that more workers will be temporarily stopped from working due to a spike in infections after quarantine rules are eased and indicated an additional downgrade in the outlook for next year’s growth rate for the global and Chinese economy. The IMF in October projected China’s growth at 3.2 percent for this year and 4.4 percent for next year.

Even without the Covid-19 fallout, the Chinese economy has been raising concerns. The real estate market responsible for 70 percent of household assets has slipped into the worst slump since 1998, translating the damage to the financial sector. Coupled with spikes in the number of Covid-19 patients, the Chinese economy could become unpredictable. One thing is for sure, the economy is not suffering a mild cold.

The United States is believed to be heading toward a recession in the first half of next year. Consumption that makes up two thirds of the GDP has been falling. Retail sales fell 0.6 percent in November from the previous month — worse than the market’s expectation of 0.2 to 0.3 percent — in the biggest dip since a 2 percent fall in December last year. The month of November is full of shopping bonanzas like Black Friday and Cyber Monday. But a negative number in that month underscores the depth of damage to consumer sentiment.

Consumer spending has stayed strong by fiscal stimuli and job increases. But the aggressive tightening by the Federal Reserve has caused a tightening spillover over to households. According to a poll by the Wall Street Journal, 52 percent predicted that the economy would turn worse next year. Just 25 percent thought it would get better and 18 percent projected it would stay the same as this year.

The two biggest economies are also the biggest trade partners of Korea. When they slip into a slowdown, our exports receive a heavy blow. The Korean economy is already doing poorly. Exports have been sinking, falling for two straight months — by 5.7 percent in October and 14 percent in November. The trade deficit will be extended for nine straight months at the end of November. This year’s trade deficit will likely top $50 billion. Foreign exchange reserves sank to $416.1 billion in November from $463.1 billion at the end of last year.

The world economy next year could wrestle with recession, pulling the Korean economy down further. The trade deficit will pile up and FX reserves will continue to thin. Corporate earnings will shrivel from interest rate hikes and inflation. Job losses are inevitable.

Recession, the big R, is looming. The government and companies must brace for the worst. Deputy Prime Minister for the Economy Choo Kyung-ho said, “We cannot make the monsoon go away. We can only take measures to minimize the damage to weaker areas.”

Bigger companies must seek a cost-saving breakthrough through innovation during a recession period. The government and companies must examine their priorities at such a critical time.