Triple whammy haunts Korean economy

2018-10-03(코리아타임스)

By Lee Kyung-min

The Korean economy is feared to face a further downturn due to a toxic mixture of three key challenges from abroad -- deepening U.S.-China trade tensions, a continued U.S. interest rate hike and soaring oil prices.

Analysts expect that if such external negatives continue to get worse, it would deal a fatal blow to Asia's fourth-largest economy already beset by sluggish domestic demand -- low consumer confidence and weak investment.

“Exports are practically the only driver of the Korean economy and trade tensions between the two largest importers of Korean goods and services pose a major risk,” said Lee Chae-woong, emeritus professor of economics at Sungkyunkwan University.

“If the sheer trade volume shrinks amid an overall decline in economic growth, the Korean economy is bound to take a heavy blow,” he added.

U.S. President Donald Trump said on Sept. 17 that he would add a 10 percent duty on $200 billion worth of Chinese products, on top of the tariffs placed on billions of dollars worth of imports from China earlier this year. The tariffs went into effect as of Sept. 24. He said he plans to raise the tax to 25 percent Jan. 1, 2019.

On Sept. 27, the U.S. Federal Reserve raised the interest rate by 25 basis points to a range of 2 percent to 2.25 percent after a two-day meeting, widening the rate gap between Korea and the U.S. to 0.75 percentage points, the widest in 11 years and two months.

The widening gap has triggered concerns over possible capital flight, putting the Bank of Korea (BOK) in a bind because of the rate hike, given it has to consider both the internal and external factors -- the rising joblessness and growing inequality here and the U.S.-China trade conflict.

What is of more concern is that the gap is likely to widen even more as the U.S. Fed indicated that it would have one more hike in December and three more in 2019 as part of measures to end its “accommodative” policy.

Besides, soaring oil prices are weighing on the Korean economy.

The WTI Crude Oil and Brent Crude rose to close at 75.41 dollars and 84.98 dollars a barrel respectively, on Oct. 2, spawning fears that the prices may return to $100 a barrel in the coming weeks.

The jump has been accelerated by the agreement between the U.S., Canada and Mexico to update the North American Free Trade Agreement (NAFTA) on Oct. 1, after more than a year of intense negotiations.

The new deal, set to be called the United States-Mexico-Canada Agreement (USMCA), is expected to largely bolster investment sentiment following the resolution of the most pressing conflict in North America.

Korea, which imports most of its oil from abroad, would bear the brunt of oil price hikes as they will end up dampening consumer confidence and business investment.

“Considering the plummeting unemployment rate among other economic indicators as of late, the only growth engine for the country remains export, given global trade uncertainties,” said Sung Tae-yoon, an economist at Yonsei University.

“And any factors beyond control are a sure point of concern, not to mention the vicious cycle where companies remain reluctant to invest or expand, which in turn results in a low, or falling employment rate,” he added.

According to Statistics Korea, Tuesday, the country's facility investment dropped 1.4 percent in August from the previous month. Investment in facilities has been falling for six straight months since March, the longest decline in 20 years.

Given that there are few options for the government to handle external challenges, experts stressed that the government should come up with measures that could revitalize the private sector by incentivizing companies to encourage job creation and invest in themselves more.

“The government should allow deregulation on businesses that owners could operate with minimal or at least manageable concerns about making ends meet amid constant threats of unforeseeable woes from abroad,” Sung said.

“The business sentiment can be easily dampened by excessive regulations, which would hamper the country's growth potential in the long term.”

Professor Lee echoed the view, saying that creating a business-friendly environment is crucial to reinvigorating the economy.

“At the end of the day, businesses create jobs. With their continued hiring freeze, there would be no income growth, which would, in turn, further reduce consumer spending and prolong the economic slowdown,” he said.