Korean economy entering '5%-5%' depressing phase

High jobless rate, rising interest rate overshadow economy

By Yoon Ja-young

Whenever the economic satiation in the United States improved, Korea used to enjoy a trickle-down effect as it was closely related with the world’s largest economy.

However, the two are showing signs of decoupling as Korean economic indices are turning for the worse while those in the U.S. are improving.

Most notable is the jobless rate. The country’s jobless rate reached 5 percent in February, with the number of the unemployed totaling 1.34 million.

Ongoing corporate restructuring, which shed jobs in the manufacturing sector, coupled with a prolonged economic slowdown, pushed the jobless figure to the highest level since the Asian financial crisis.

The 5 percent unemployment rate is higher than that of the United States, which stood at 4.7 percent in February on an improving economy. This is the first time since 2001 for Korea’s unemployment figure to be higher than that of the U.S.

Due to poor job market conditions, many are left with no other option but to earn a living through self-employment. The number of self-employed people increased by 213,000 last month, and majority of them started businesses without any employees.

“With employment decreasing in the private sector, job figures are increasing only in the self-employed sector where the entry barrier is low,” said Bin Hyun-joon, the director in charge of employment at Statistics Korea.

The increasing number of the self-employed is adding to concern over household debt as many start their business by taking out loans.

According to a report by the central bank, the possibility of a self-employed person closing down his business rises by up to 10.6 percent when lending rate rises by 0.1 of a percentage point, as they mostly start their business using large loans.

Following the United States’ key rate hike, the country’s lending rate is accelerating despite a freeze by the Bank of Korea (BOK).

The U.S. Fed raised its benchmark rate March 15, with analysts expecting a series of hikes to follow until 2019. It will rise to over 2 percent next year, reaching 3 percent in 2019.

While analysts in Seoul expect the BOK to avoid raising key rates this year due to concerns over capital flight, the U.S. hike is already affecting the lending rate here.

Mortgage rates offered by major local banks rose steeply to around 4.5 percent recently, and are soon expected to surpass 5 percent. The interest rate on credit loans offered at savings banks averaged 22.88 percent in January, rising 0.5 percentage points in just one month. The central bank estimates that a 1 percentage point rise in the lending rate will increase the annual interest burden on households by 9 trillion won.

Quality of stock gains also questionable

Despite a gloomy economic outlook, the stock market has been performing well, on ample liquidity, active foreign buying and robust Samsung Electronics shares.

Analysts say it doesn’t necessarily reflect the real economy.

“To be more concrete, the KOSPI has improved but not the KOSDAQ,” said Park Sang-hyun, the chief economist at Hi Investment and Securities.

He explained that the country’s big exporters like Samsung Electronics led the main bourse, while other businesses focusing on the domestic market or those listed on the junior KOSDAQ market haven’t inched up. The country’s exports have been rebounding since last November while domestic consumption has lost steam.

The KOSPI closed at 2164.58 Friday, up 14.5 points from the previous day.

Park said that the recent rise is due to a global rally.

“While the Korean economy is in bad shape, other countries have seen improvements. Global funds have thus been moving to risky assets like stocks from safety assets like bonds. This has also started entering emerging markets, including Korea.”

He added that the Fourth Industrial Revolution has led to expectations of an “IT super-cycle,” pulling up semiconductor shares like Samsung Electronics as a result.