Looking back on the economy in 2007The global economy slowed down and oil prices remained stubbornly high in 2007, but both issues have failed to drag down the Korean economy. It has grown 4.8 percent since 2006.
This is even more remarkable considering that the world’s economy has entered a correction in the face of the U.S. subprime mortgage woes, after enjoying solid expansion for three years thanks to low interest rates and excessive liquidity.
However, the local economy has been led by exports, not domestic demand, with the “trickle-down” effect (meaning that the fruit of economic growth expands progressively) rarely seen. As a result, consumer sentiment has weakened. The low-income class has had a hard time keeping afloat; households with incomes in the lowest 20 percent bracket have incurred a deficit of 350,000 won ($374.31) every month. Small- and midsized enterprises have seen sluggish sales and earnings.
The labor market appeared stable with only a 3 percent unemployment rate, but in fact harbored insecurities about jobs with as many as 550,000 people preparing to start looking for jobs and 1.3 million non-regular workers among employed youth.
There were several notable issues regarding the economy in 2007. First on the list was the per-capita national income breaking the $20,000 barrier. It has taken 12 years to reach this landmark, longer than an average 9.2 years for industrialized nations. Yet, in achieving this, changes in foreign exchange rate and prices didn’t play the biggest role ― real income was a far bigger influence than in countries like Israel, New Zealand, Portugal and Spain.
Second was the Kospi index surpassing the 2,000 mark within 18 years of 1989, when it climbed over the 1,000 mark. Market capitalization as well has surpassed 1,000 trillion won. Due to continuously bull markets, market PBR (price-to-book ratio of the Korea Exchange) reached over one for the first time in a decade, representing stock prices higher than book value. Such a stock boom has resulted from ample liquidity circulating in the economy and corporate earnings that were far better than average. Ample liquidity that has flowed into equity funds has driven up stock prices. The balance of equity funds soared from 46 trillion won at the end of 2006 to 107 trillion won at the end of November this year since the housing slump directed excessive liquidity largely into equity funds.
Thus, 2007 could be remembered as the year when investment began taking the place of bank deposits among Korean households.
Third was a volatile financial market. The U.S. subprime mortgage woes showed visible effects in February, August and November in 2007, causing the credit crunch in the global financial market. Each time, the won-dollar exchange rate also fluctuated wildly.
At home, the rapid transfer of money into the capital market deprived banks of money and led them to issue certificates of deposit or bonds for fund raising, lifting CD rates to the region of 5 percent for the first time in four years.
Fourth was strong traditional industries and weak IT. Traditional industries like machinery and shipbuilding were helped by higher demand from the Middle East and newly industrializing countries, not to mention technological competitiveness accumulated over the last 40 years. Exports rose 21 percent and sales 12 percent for three quarters in 2007. In contrast, the IT industry’s sales grew only 7 percent because of a worldwide supply glut and resulting price cuts. To be specific, memory chip manufacturing faced increased supply as the 12-inch line entered full production around the world following drastic investment during the boom period between 2004 and 2006.
Fifth was a depressed housing market in Korea. In 2007, a series of anti-speculation measures succeeded in their goal of stabilizing housing prices, but the house trading volume decreased 12 percent year on year until September. Moreover, construction companies’ continued insistence on commanding high prices for newly built apartments and advancement into local markets led the number of unsold new homes to reach over 100,000 for the first time since 1998.
Against this backdrop, the hottest economic topic for a new government will be the “leap forward of the Korean economy” in 2008. It is largely agreed that the outcome of the 17th presidential election reflects the public aspiration for a more dynamic economy.
It may be difficult even to maintain current growth momentum unless potential is fulfilled amid unfavorable conditions at home and abroad: a slowing global economy, a volatile world financial market, mounting household debt and a Korean version of the U.S. subprime mortgage woes.
These all point to a need to encourage the domestic demand. First, the government should ease tax burdens, boosting purchasing power, and fortify business and consumer sentiment and support the finding of new growth engines, stimulating corporate investment. Second, it needs to enhance the competitiveness of vulnerable groups such as SMEs and service providers. Finally, it must work hard to manage risk in preparation for the possible spread of internal and external risks in 2008.
The writer is a research fellow at the Macroeconomic Research Department, Samsung Economic Research Institute. Contact SERIHWS@seri.org with enquires.