Korea to enter correction period

By Kim Jae-kyoung

A slowdown in major economies, such as the U.S. and Europe, will hamper growth of the Korean economy, according to a global economist.

In an interview with The Korea Times, Patrick Artus, chief economist of NATIXIS, one of the major banks in France, said that Korea’s fast economic recovery will lose momentum in the next few quarters.

“Korea remains a country that is very exposed to external demand and as such it will suffer significantly from the fall in demand from Europe and the U.S. Moreover, domestic demand perspectives are still uncertain due to the persistence of strong leverage of the private sector, especially the household sector,” he said.

“Although we remain fundamentally optimistic on the role of domestic demand in the medium term we see the possibility of further adjustment in the short term that would hamper growth in the next few quarters,” he added. “Of course we just hint at a slowdown for Korea in the next few quarters, not a new recession.”

He stressed that the Bank of Korea (BOK) should keep the key interest rate low as the economy is not exposed to inflation risks. “Given that core inflation remains very low, I think it is rather disinflationary,” he said.

Artus, who is also a professor of economics and finance at Ecole Polytechnique in France with expertise in international economics and monetary policy, proposed an even bleaker outlook for the U.S.

“Slow growth in the US is due to two factors. First, the public support of the economy is waning at a time in which the private sector is clearly not able to support a self-sustaining increase in demand,” he said.

“The second element is linked to the savings of households. In the past quarters, in order to finance the desired level of consumption, U.S. households have significantly depleted their savings as the labor market was not picking up enough. We are probably reaching critical levels in this savings depletion, at which the U.S. consumer feels even more vulnerable than before,” he added.

He forecast that in the next few months the U.S. will see slower consumption as households try to protect their savings and the labor market does not pick up enough to guarantee an increase in purchasing power.

Regarding the debt fiasco in Europe, the veteran economist said that the debt crisis is not over but it has passed the worst point.

“There has been significant action on the side of the European institutions to contain the crisis. A multilateral special package for Greece and a more general loan mechanism that was financed to up to 750 billion euros was judged to be well endowed to counter crisis in relatively small countries, such as Ireland, Greece and Portugal,” he added. “The financial phase of the crisis has been addressed and the worst of it is behind us.”

As for China, he said, “Outlook for China is very benign. The current slowdown is the direct consequence of the soft policies that the authorities have put in place to moderate the pace of growth in some sectors that were showing clear signs of overheating, such as construction.”

“In the second half of the year, the GDP will continue to moderate its pace of growth gradually, responding to much lighter external demand,” he added.