‘One team’ spirit needed for economic recovery

The Bank of Korea (BOK) last week held the base rate steady at 3.5 percent. The fourth straight instance of inaction underscores the central bank’s dilemma in rate-setting due to the vulnerability of the economy. Prices are stabilizing. The consumer price index added 2.7 percent last month compared to the same period a year ago, the first dip into the 2-percent range in 21 months. But the economy remains lethargic. The Korea Development Institute says the economy is bottoming out, but the government predicts our annual growth will stop at 1.4 percent.

The central bank can hardly lower the benchmark rate to stimulate the economy. The upward pressure for prices still remains due to unstable energy and utility rates. The increases in household debt also pose an alarm. BOK Gov. Rhee Chang-yong said that the central bank will discuss a rate cut upon the conviction that prices are zeroing in on the target range of 2 percent.

The gap between Korean and U.S. interest rates would be widening to a fresh record later this month. The U.S. rate is higher by a maximum 1.75 percentage points now, but it may widen by 2 percentage points if the Federal Open Market Committee opts to raise the Fed funds range by 25 basis points later this month.

There is yet any sign of capital flight from the domestic market. But short-term capital that chases immediate returns can move on the widening rate gap. The biggest worry is the sluggishness in the economy. Exports are still sagging. In the first 10 days this month, exports sank 26.9 percent against the same period a year ago and may extend their losing streak for the ninth consecutive month. The external environment has become more volatile. Exports to China in the first half plummeted 26 percent. The effect of the reopening in China after the pandemic also was less than expected while Korea’s competition with Chinese products has intensified.

The supply chain conflict stemming from the U.S.-China contest complicates Korea’s export strategy. Governments have become deeply involved in industrial policies through subsidies and other protectionist programs. Pointing to governments increasingly meddling with corporate competitiveness, Chey Tae-won, chairman of the Korea Chamber of Commerce and Industry, said. “We are up against governments and companies in competitions.”

The Korean economy has weathered multiple challenges through the joint government-corporate efforts. The government’s free trade agreements with foreign countries have widened Korea’s economic frontiers along with its development of the reactor industry for exports. The government and companies must have close communication and cooperation to fight the challenges together.