Korea should brace for global slowdown

―Analysts call for policy modification to boost private sector

By Lee Kyung-min

Korea, already beleaguered by sluggish investment and a worsening job market, is facing a bumpier road ahead as the world's major economies, including China, Japan and Germany, are showing clear signs of losing growth momentum.

What is of more concern is that the United States, the world's largest economy that has underpinned global growth over the past year, seems to have reached its peak and is likely to see a slowdown.

Given that Korea is a small, open economy with a heavy reliance on external shipments, particularly those to the U.S. and China, it is inevitable that Asia's fourth-largest economy will bear the brunt of a global slowdown.

Experts say Korea should come up with measures to respond to a possible worldwide downturn as its economy will become more vulnerable to “external shocks” that may be unmanageable in the event of a steep decease in global market demand

They pointed out that Korea's growth is mostly bolstered by brisk overseas chip sales amid an already weaker investment sentiment and subdued consumer confidence.

“The country can do little about external factors over which we have no control,” said Yun Chang-hyun, a business professor at the University of Seoul,

“Instead, what I would suggest is that the country find ways to boost resilience to better deal with economic woes, with strong agility and readjustment.”

Japan's economy shrank 0.3 percent in the third quarter in 2018, following the same rate of decrease observed in the first quarter.

Largely affected by a series of natural disasters including Typhoon Jebi that wreaked havoc across the western region in September, Korea's neighbor has seen two consecutive quarterly contractions ― the first since 2012.

Germany's economy also shrank for the first time since 2015 in the third quarter of 2018, hit by a reduction in car sales following faulty emissions testing procedures and a subsequent decline in exports, which was also affected partly by the U.S.-China trade war.

According to the preliminary figures from the Federal Statistical Office in Germany, the country's economy saw a 0.2 percent decline in gross domestic product in the third quarter.

China, despite optimism in the sectors of infrastructure investment and industrial production, remains the single largest determinant for global economic instability.

It saw third-quarter growth fall to 6.5 percent from the previous year, the weakest pace since the global financial crisis in 2009.

Growth in the fourth quarter will be worse given the escalating trade tensions with the U.S.

Emerging market economies are also expected to suffer, given their heavy reliance on China for exports, their key driver of economic growth.

According to Bank of America Merrill Lynch, for every 1 percentage point slowdown in China's GDP, emerging markets lose an average of 0.7 percentage points in growth.

In its latest outlook report, the International Monetary Fund (IMF) cut its forecast for the U.S. and China to 2.5 percent and 6.2 percent, respectively, from the previous prediction of 2.7 percent and 6.4 percent.

Policy adjustment urgent

Experts said the Korean economy will continue to suffer slower growth amid global uncertainties coupled with a lack of new growth engines and “growth-hampering” regulations.

Yun said the government should promptly revise policies and face the reality that the most vulnerable group of people is the first to take the hit of in an economic downturn.

“The government raised the minimum wage at a rapid pace saying the measure would boost people's income at a corresponding pace. But look at what happened,” he said.

“More people are being laid off. For them, regular salary, however small, is much preferable to not having a job at all. If the law takes effect on the hiked minimum wage in 2019, a substantial number of people will be forced out of their jobs.”

The experts stressed that policymakers should help create an environment where businesses are encouraged and stay motivated to work, as a long-term boost for the economy.

“Economic conditions are increasingly becoming worse, primarily due to reduced investment,” said Sung Tae-yoon, an economist at Yonsei University.

“Corporate investment in facilities and the construction sector is on a steady decline. They are further constrained by headstrong government policy on minimum wage hikes and shorter working hours.”

The economy will further tank ― let alone the prospect of robust growth ― if the government refuses to listen to the shared concerns of businesses, especially small- and medium-sized enterprises

(SMEs), he added.

“For workers, the jobs on the lower end of economic scales are disappearing fast. The same goes with the businesses. SMEs at the bottom of the corporate value chains will be the first to go bankrupt. The situation will become worse in 2019.”

However, private enterprises for their part should continue innovation to survive in the cut-throat competition, according to the experts.

“Now the semiconductor and IT industries are in good shape, but they need to know that they must be prepared with a strategy to save themselves from unexpected shocks that are both internal and external,” said Ryu Deock-hyun, an economics professor at Chung-Ang University.

“Without any effort to strengthen competence, they will have no excuse to ask for the government's help in the form of massive bailout. The Korean people will be hard pressed to accept the request.”