Value context and insight. lkm@koreatimes.co.kr
Contribution Korea urged to tackle demographic challenge for sustainable growth
Rajiv Biswas
By Lee Kyung-min
By Rajiv Biswas
The South Korean economy rebounded in 2021 with estimated GDP growth of 4 percent despite the ongoing COVID-19 pandemic. The outlook for 2022 is for sustained economic expansion at a pace of around 3 percent. However, despite the high share of the South Korean population that is fully vaccinated, the pandemic continues to be a key downside risk to the economic growth outlook for 2022. The detection of an increasing number of local cases of the highly transmissible Omicron variant during mid-December has added to fears about an escalating COVID-19 wave extending into early 2022.
The OECD advanced economies and Asia-Pacific industrial nations are expected to be the key growth engines of the world economy in 2022. The impact of the COVID-19 pandemic is expected to be gradually contained in these nations, helped by their high current vaccination rates and access to vaccines for booster shots. This will support the continued expansion of domestic demand in these economies, as well as driving growth in world trade.
Reflecting sustained global economic expansion, South Korea's export sector is expected to continue to grow strongly in 2022, helped by another year of firm growth in the world economy. South Korea's largest export market, China, is forecast to grow at a pace of 5.5 percent in 2022, while the U.S. economy is expected to grow at 4.3 percent. Domestic demand is also expected to recover during 2022, as the COVID-19 pandemic is gradually contained. This is expected to allow an easing of pandemic containment measures, supporting a rebound in private consumption.
However new variants of COVID-19 pose a key downside risk to the economic outlook for 2022, notably the rapid transmission of the Omicron variant in a growing number of nations worldwide. Meanwhile, the world economy also faces a number of key geopolitical risks in 2022, notably escalating cross-Strait military tensions as well as the military confrontation between Russia and Ukraine.
Supply chain disruptions in 2022
Supply chain issues continue to impact South Korea's manufacturing industry, according to the latest IHS Markit Purchasing Managers' Index survey for November 2021. The survey indicated that manufacturing output volumes fell for the second successive month, while new order growth broadly stagnated as manufacturers reported that sustained supply chain disruptions placed additional strain on business operations. Notably, South Korean automobile production in November continued to decline, falling by 6.6 percent year-on-year in volume terms, reflecting continued supply chain disruptions.
Global supply chain disruptions are expected to continue in 2022, with long delivery times for new orders for a range of products, notably semiconductors. These disruptions are expected to continue to impact on manufacturing production in sectors that are highly dependent on semiconductors, notably electronics and auto manufacturing. Adding to demand pressures, many companies worldwide are trying to build up higher inventories of critical components to mitigate risks of future disruptions.
Near-term risks
In the near-term economic outlook, the containment of the COVID-19 pandemic remains crucial for sustained economic expansion in South Korea. Consequently, booster vaccine rollout and use of new tablet treatments for COVID-19 will be important in order to contain the pandemic. An important risk to the outlook for 2022 is from new COVID-19 waves hitting South Korea or its key global markets such as the U.S. and China.
Inflationary pressures also remain a risk to the near-term outlook. A combination of factors, including higher raw materials prices, supply chain disruptions and high shipping freight rate costs have contributed to rising input price inflation pressures for South Korean firms during 2021. Some of these inflationary pressures are likely to persist during 2022. Consequently, some further tightening of monetary policy by the Bank of Korea (BOK) is likely in 2022. A key concern for the BOK is also the rapid rise in house prices in recent years, with higher policy rates expected to help curb risks of a property sector bubble
Medium- to long-term risks
A key macroeconomic risk to the South Korean economy over the medium- to long-term outlook continues to be from the high level of household debt as a share of disposable income. This has risen to 200 percent by 2020, the fifth-highest amongst all OECD countries. A key factor driving this debt ratio higher has been large mortgage lending flows for residential property purchases. This has fueled rising property prices and has led to fears of a speculative property bubble. Such a high household debt ratio creates macroeconomic vulnerability to further significant monetary policy tightening in a high-inflation scenario.
Another key long-term challenge for South Korea will be to smoothly manage the energy transition towards renewable energy. Some other major industrial economies, notably China, have faced power shortages during 2021, partly reflecting policy efforts to reduce carbon emissions. South Korea has taken a global leadership role in the use of hydrogen through initiatives to develop hydrogen as a key future fuel source for domestic power generation.
Long-term demographic aging also has severe implications for South Korea's economy and society. The number of senior citizens aged 65 or over has already reached 16.5 percent of the population and is projected to rise rapidly to 20 percent of the population by 2025. Meanwhile the working age population (aged 15 to 64) is declining as a share of the total population, from 71.4 percent in 2021 to a projected 55.7 percent by 2041.
South Korea's demographic aging has already contributed to the moderation in the potential GDP growth rate from around 7 percent per year in the mid-1990s to around 2.5 percent per year by 2021. By 2050, due to demographic aging, the potential growth rate could drop to a range of around 1 percent to 1.5 percent per year.
Therefore, a key policy priority for South Korea will be to undertake structural reforms to increase the potential growth rate. This includes reforms such as policy changes to lift the labor force participation rate, improve service sector productivity, accelerate digitalization and further boost the adoption of industrial automation.
The writer is Asia-Pacific chief economist at IHS Markit.