By Kim Tong-hyung
Bad data on exports, consumption and household finances underline the fragility of the economy as election day looms. How the economy will be managed this year will very much determine the direction it will take in 2013.
``It could be said that some of the uncertainties surrounding the European financial problems have been eased and the spending plans in the United States and China will eventually show. So it looks like the world economy is on course for a moderate rebound and the Korean economy will move in accordance,’’ said Lee Geun-tae, an economist at the LG Economic Research Institute (LGERI), which predicts economic growth to level out at 2.5 percent for 2012.
``An improvement in economic activity, however, wouldn’t mean that the Korean economy is really on its way back. Advanced economies will continue to reduce government debt and that will limit the growth in demand in those countries. The weight of excessive household debt and property market woes suggest that the rebound in Korea’s consumer spending levels will be moderate.’’
It’s hard to imagine economic activity managing a robust rally in the remainder of the year. Corporations and municipalities have been scaling down or bailing from big projects and are unlikely to commit to large investment before the next head of state unpacks at Cheong Wa Dae.
Policymakers have expressed optimism about an improvement in exports, which have been stuck in a year-on-year decline through August, anticipating a rebound in demand in major markets like Europe, the U.S. and China.
However, market experts point out that recent stimulus steps in the U.S. and Europe were necessary but hardly sufficient.
Even after the latest round of quantitative easing, growth in America is expected to measure around an underwhelming 2 percent. China, the machine that drives global capitalism, may have just begun its inevitable regression from a sprinter to walking briskly.
The real problem for Korea is that even a meaningful rebound in exports, which is hardly a given, could only do so much to cure the dire state of the consumer economy, brutally exposed by freefalling retail sales and a paralyzed housing market.
While a rise in exports could pull up employment and boost incomes, it’s hard to imagine the improvement being dramatic enough to offset the drag-down effect falling property values have on consumption.
Official figures show that Korean households owe as much money as the entire economy generates in a year, with millions of people facing a lifetime of indebtedness after their ill-advised splurge on property before the crisis.
The country appears to have neared its capacity in terms of infrastructure investment and increasing the construction of new homes will be suicidal for builders when they are crushed by the inventory of unsold ones.
``The remainder of the year could prove to be a decisive moment for the housing and real estate markets, especially if the bad external conditions and household debt problems begin to rattle the real economy and financial market stability,’’ said Park Won-gap, head of KB Kookmin Bank’s real estate business department.
``With the housing market now depending entirely on non-speculative demand, another hit to the real economy could be the uppercut that floors the sector.’’
Unemployment is another problem. Korea’s appears to have lost its ability to create quality jobs as a dominant majority of new positions created in the past year went to people over 50, confirming that the country’s still decent employment rate has been padded by low-paid, casual work.
And around 16 million of Korea’s 41 million people above the age of 15 are deemed economically inactive as they are neither working nor looking for work. The economically inactive population has bloated in recent years because of the increasing number of people shaved off payrolls and those forced into self-employment.
The slew of bankruptcies among self-employed people doubles as an alarm that the country’s household debt trap is about to snap shut, according to Seo Young-soo, a senior economist at Kiwoom Investment and Securities.
``The country’s household debt problems are tied to the struggles of low-income households and self-employed people. The real concern is that the government is tackling this problem by focusing on the house poor, or homeowners stuck in negative equity,’’ said Seo.
``Those with debt-to-income ratios of over 10 percent and loan-to-value ratios of less than 70 percent, which fit the government description for the house poor, are tied to about one-third of the household debt mountain. However, the liabilities of low-income households and the self-employed combine for more than half of the total.’’