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Calm the recession scare through a policy mix

Published: 05 Aug. 2024, 20:02

Fears of the world’s mightiest economy veering toward a recession spooked the market across the globe. The euphoria after a strong indication of a monetary shift easing in September from Federal Reserve Chair Jerome Powell was short-lived upon a batch of softening data — a worsening unemployment rate and the Purchase Managers Index for July — which triggered a sell-off of technology stocks. Asian stock markets also crashed on a gloomy Friday. Seoul’s main bourse lost a whopping 78.64 trillion won ($58 billion) in market cap on that day.

A recession in the United States poses a complex whammy for the Korean economy. If the pace and intensity of rate cuts in the United States accelerate, the Bank of Korea will likely follow the move. Interest rates need to come down in Korea as inflation nears the target range while the economy fell 0.2 percent in the second quarter against the previous quarter on depressed private consumption and facility investment. The deepening debt burden of the self-employed and small merchants also requires some relief.

But a rate cut can further stimulate the newfound heat in the real estate market and the ongoing buildup of household debts. Apartment prices have been on the rise for 19 straight weeks amid expectations for a rate cut and eased loan regulations. Rent prices have been increasing for 63 consecutive months. Home prices in the capital region rose by the steepest margin in 45 weeks. Apartment subscriptions also have turned red-hot, fueling growth in household loans. Mortgage loans from five commercial banks surged by 7.6 trillion won last month after increasing by 5 trillion won monthly from March. Lowered rates can certainly fan the heat.

A U.S. recession also can spell bad news for the chip industry that primarily drives our exports. The fad over AI is fizzling out amid stagnation in demands for smartphones and PCs. Intel’s stock tanked in the biggest crash of 26.06 percent in a half-century. Warren Buffett’s Berkshire Hathaway said it had slashed its stake in Apple by nearly 50 percent in the second quarter.

The government’s economic management comes under a tough test as it needs to maneuver the fragile economy against the recession fears, a rate cut, the bubbly real estate market and growing household debt. The government must present a convincing policy mix on real estate based on sufficient supplies to contain the heat.

It must not repeat the mistake of stoking confusion and speculation through the deferment of the second-stage stress-based debt service ratio and its laid-back assessment of the real estate market. The legislature must break out of its self-serving political fight and join the efforts to defend the economy from a looming crisis.