Can economy withstand mixture of negatives?

By Kim Tong-hyung

Life could be like a box of chocolates, although credit-crunched Koreans might prefer a pack of cigarettes. While it’s too early to make a sophisticated guess at what lies ahead in the next 12 months, the heady mixture of negatives surrounding the economy suggest that its ceiling is low and floor much lower.

The Korean economy exited 2011 with a whimper on a blizzard of bad data sweeping key indictors like exports, investment and consumption, all resulting in a sharp fall in growth.

Entering 2012, there seems to be more reasons to think that things will get worse before they get better.

Externally, the sovereign debt crisis gripping European continues to let the air out of Korea’s export-dependent economy. From within, the country is struggling to cope with weakening consumption, unemployment and families sinking under a sea of debt.

Then there is the typical commotion anticipated in an election year, with voters expected to pick new lawmakers as well as the president. The heightened uncertainty surrounding North Korea and its new baby-faced despot is not helping either.

Providing a gloomy update on the state of the economy, the Ministry of Strategy and Finance last month dramatically cut its growth forecast for this year and emphasized threats posed by the eurozone debt crisis. The ministry now expects the economy to grow 3.7 percent in 2012, cutting its previous prediction of 4.5 percent.

Finance Minister Bahk Jae-wan, a usually upbeat policymaker, says the economy is as vulnerable as ever and faces a ``compound’’ of dangers.

Bahk’s comments were milder than those of another high-ranking government official who, on the condition of anonymity, wondered whether the Korean economy is destined for a lengthy ``ice age,’’ comparable to what it experienced in the late-1990s.

``Numbers show that the fall in economic growth is becoming more obvious, evidenced by November’s industrial production inching down in almost all categories. Manufacturers are coping with increasing inventory due to declines in exports, which, considering the softening of both domestic and external demand, will likely add to deflating pressure on output,’’ said Shin Byeong-ghil, an economist at Solomon Investment and Securities.

``External factors are the biggest reasons behind the weakening of Korea’s economic activity, so the situation in Europe warrants closest attention,” Shin said. “Should Europe allow its debt problems to spill over further and extend the economic sluggishness in the region, this could also sap energy from th economies of the United States and China, which could deal a significant blow to Korean exports. Needless to say, the meeting scheduled among European leaders on Jan. 30 will be closely watched.’’

Exports, after rising 20 percent year-on-year through the first three quarters of 2011, benefiting from one-time factors such as the devastating Japanese earthquake and the delivery of new ships, have been tailing off.

They are expected to take a harder hit in the New Year, with the sluggishness of rich economies expected to drag down global demand for Korean consumer goods, technology components and ships.

The decline in demand for Korea products in crisis-hit Europe is becoming visible and government officials here are also alarmed over slowing growth in exports to China.

Subduing exports, which account for about half of the Korean economy, are particularly alarming when consumption remains decimated and business investment is evaporating.

Family finances have been deteriorating sharply in recent years as well. The growth in income has been lagging the pace of the gross domestic product (GDP) since the mid-2000s, while the ratio of the country’s household debt to disposable income is now racing toward 160 percent.

Korea’s borrowing binge has been fueled largely by speculative demand for property for most of the past decade and now millions of people find themselves trapped with negative equity as housing prices have been in a freefall since the collapse of Lehman Brothers.

And with consumer prices losing their sense of gravity in recent months, lower-end borrowers have been piling onto the country’s mountain of debt more desperately as they struggle to fund the increasing cost of living.

While policymakers claim they have unemployment under control, the majority of new openings are going to people in their 40s, 50s and 60s, showing that the employment rate has been padded by low-paid, precarious jobs.

And even those jobs will become much scarcer in the New Year. The finance ministry anticipates the country will create 280,000 new jobs this year, a significant reduction from 400,000 estimated for 2011.

``The drop in exports will lead to a decline in wages, which again will influence consumption. The declining profit of export companies will result in a reduction in hiring at manufacturers and this will mean that labor demands for higher wages will not be great,’’ LG Economic Research Institute (LGERI) said in a recent report.

``Low-income earners took on more debt in 2011 to support their cost of living and they will be facing a debt repayment burden for 2012. For this group, a reduction in debt equals a reduction in consumption.’’

With exports and consumption losing steam, it appears that government expenditure will have to pick up the slack in driving economic growth, despite all the finance ministry’s speechifying about fiscal health.

It’s likely that this year’s parliamentary and presidential elections, which have both the Grand National Party (GNP) and opposition Democratic Union Party (DUP) throwing around welfare-related promises, will further press the government to assume a more expansionary stance.

In an e-mailed report Tuesday, HSBC economist Ronald Man observed that downside risks are materializing for the Korean economy, with domestic and external demand facing heightened uncertainties and fiscal policy expected to be influenced heavily by the upcoming elections and possible developments in North Korea.

``Private consumption should slow down in 2012, with its growth being the weakest in the first quarter. A particular area to keep an eye out for is the employment market. In December 2011, the HSBC Korea PMI employment sub-index recorded its first monthly contraction in almost three years,’’ wrote Man, who expects the country’s inflation-adjusted gross domestic product (GDP) to grow by 3.1 percent in 2012.

``With stagnant wage growth, flat property prices in Seoul and rising household debt, the purchasing power of consumers will continue to erode. Furthermore, as banks continue to tighten lending to households despite sustained demand for credit access, maintaining consumption growth is going to prove increasingly difficult.’’