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By Kim Bo-eun
The global economy is facing growing risks of slipping into recession, as the world's major economies are losing steam due to a slowdown amid lingering uncertainties caused by an escalating trade dispute between the U.S. and China.
Experts said that Korea is likely to be a major victim of any such recession due to its heavy dependence on external trade. Against this backdrop, several organizations and global investment banks have downgraded their 2019 growth forecasts for Korea to below 2 percent
The epicenter for fears over a recession is the U.S. financial markets where yields on two-year bonds exceeded those on 10-year bonds last week for the first time since 2007, before a major financial crisis broke out the following year. The yield curve inversion is considered a sign of an oncoming recession.
What is of more concern is that a growing number of major economies in Europe and Asia suffered economic contractions in the second quarter. A defined recession refers to a situation in which an economy contracts for two consecutive quarters.
Germany's economy contracted 0.1 percent in the second quarter from the previous quarter, compared to 0.4 percent growth in the first quarter.
Singapore, which is considered a bellwether for global economic health, also saw its GDP shrink 3.3 percent in the second quarter.
The contraction of both economies is attributed largely to the ongoing trade war between the U.S. and China.
The trade conflict between the world's two largest economies is also weighing on Korea, an economy heavily dependent on exports.
Korea also faces falling trade with Japan, after the latter imposed restrictions on imports of key materials for semiconductor and display production, and both countries removed each other from their "whitelist" of countries receiving preferential treatment in trade.
Exports dropped 11 percent in July from a year earlier due to a decline in outbound shipments of semiconductors, which fell for the eighth consecutive month, according to data from the Korea Customs Service.
Amid the worsening situation, the government lowered its growth forecast for this year, with the Bank of Korea revising its figure to 2.2 percent in July.
But global forecasting agencies have given bleaker predictions, with many making downward revisions in recent months to below 2 percent.
ING and IHS Markit forecast growth as low as 1.4 percent, while Nomura and Morgan Stanley predicted 1.8 percent, and BoA Merrill Lynch, JP Morgan Chase and Goldman Sachs, 1.9 percent.
"Korea faces bad circumstances both internally and externally," Yun Chang-hyun, A professor at the University of Seoul, said. "All of the negative factors are appearing to overlap."
He pointed out that domestic policies based on income-led growth have made the country more vulnerable.
"Like a person has to be fit to withstand cold weather, businesses need to be in good shape to be able to withstand difficult conditions," Yun said. "But this is not the case for Korea, whose policies have led to high costs and low efficiency."
The economist said, "there is high possibility Korea's growth rate will fall below 2 percent, both this year and next year."
Park Chong-hoon, head of economic research at Standard Chartered (SC) Bank Korea, said, "We are in a situation where concerns have become a reality ― like a 10 percent tariff imposed by the U.S. on China."
"What is worrisome is that Korea has a small domestic market, so it will be hit harder as countries move from open to closed economies," Park said.
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