Age of stagnation
Korean economy entering long tunnel of low growth
By Kim Jae-kyoung
Korea is entering a phase of stagnation due to a toxic cocktail of the slowdown among its major trading partners and economic pessimism prevalent among consumers, economists said.
Many are worried about another crisis amid volatile global financial markets but they said Korea is more exposed to stagnation, which means “no acute crisis but also no economic rebound in the foreseeable future.”
“I think stagnation has become the 'new normal' for the global economy,” Mauro Guillen, director of the Wharton School at the University of Pennsylvania, said. “Korea is also entering a state of stagnation because Korea depends on exports for growth.”
Stagnation refers to a prolonged period of little or no growth ― of less than 2 percent to 3 percent a year.
The Korean economy grew 2.6 percent last year, following 3.3 percent in 2014, 2.9 percent in 2013 and 2.3 percent in 2012. The growth rate is expected to fall even further this year if the global slowdown continues.
“I think the Korean economy is entering stagnation,” Stijn Van Nieuweburgh, economics professor at New York University (NYU), said. “Global growth forecasts have been revised downward time and time again over the past five years. High consumer debt is another warning signal for low future growth.”
He is the director of the Center for Real Estate Finance Research at NYU. Korea’s household debt reached a record high of 1,200 trillion won last year.
Most advanced economies, such as the U.S, Japan and Europe, have already been trapped in stagnation as they have settled into low growth for a prolonged period. The U.S. expanded 2.5 percent last year, while Europe and Japan grew 1.5 percent and 0.6 percent, respectively.
In 2015, China, now Korea’s biggest trading partner, grew 6.9 percent, the slowest rate in a quarter of a century. The International Monetary Fund forecast China to grow 6.3 percent this year.
“Korea’s largest trading partners ― Japan, the U.S., China and Europe ― are all suffering,” Jim Rogers, the legendary billionaire investor and chairman of Rogers Holdings, told The Korea Times. “The U.S. is struggling, while Japan and much of Europe are in recession. That’s what’s going to happen to Korea.
“The world is suffering and you are part of the world. If the U.S., Japan and Europe have problems, you too will have problems.”
What is lending credence to concerns about stagnation is the excess pessimism among Korean consumers.
In its 2015 consumer sentiment survey, Nielson, a global survey firm, found that Korea ranked at the bottom among 61 countries surveyed, with its index standing at 46 points in the fourth quarter of last year.
It was three points down from the quarter before and even below Japan’s 79 points. A reading above 100 means optimists outnumber pessimists, while a reading below 100 means the opposite.
‘Economic equation’ not working
On top of the economic data, to see the risk of Korea entering stagnation it is useful to understand the new dynamics of the global economy reorganized by three major forces in the wake of the global financial crisis in 2008.
First, major central banks, including the U.S. Federal Reserve, have introduced unconventional policies, such as quantitative easing (QE) and zero interest rates, which prevent markets from meltdown but instead cover hidden problems, thus hurting the resilience of economies.
Second, with the global economy closely interconnected and new technologies disrupting old ways of conducting business, economic theories that ruled the last century are becoming irrelevant. In other words, the effects of economic policies have grown less and less as transmission channels do not work as they did.
Finally, economic fundamentals used to set the tone for financial markets but regardless of fundamentals, economies are now heavily swayed by speculative funds in the markets due to lingering uncertainties.
All these factors are combining to indicate that none of Korea’s main customers ― the U.S., Japan, China and Europe ― will bounce back soon, implying that Asia’s fourth-largest economy has little chance of picking up soon.
Agreeing that Korea has entered stagnation, Sohn Sung-won, economics professor at California State University, said it is important to understand the implications of ongoing shifts.
“The old economic equations are not working as they used to,” he said. “Fifteen years ago, I mainly paid attention to the U.S. economy. U.S. economic policies, especially the Federal Reserve, had a major impact on the world. The rest of the world followed the U.S. economy more or less. This is no longer the case.”
Sohn, who was named the most astute economist in the U.S. by The Wall Street Journal and Bloomberg, said nowadays, what happens abroad matters a lot, including with China, the Middle East, oil and commodity prices.
“Since there are more moving parts in the global economy, there is more uncertainty,” he said. “This is the new normal. With heightened uncertainty, there will be more volatility in the economies of the world and financial markets. Also, it will hurt global economic growth.”