Korea faces danger of L-shaped recovery

Rigid labor, income growth policy seen as biggest risks to economy

By Lee Kyung-min

The Korean economy is expected to face another rocky path in 2019 as it is set to undergo an L-shaped recovery, according to economists.

They expect the economy is unlikely to bottom out and bounce back soon due to multiple challenges both domestic and international, including an inflexible labor market, the government's income-led growth policy and U.S.-China trade feud.

This means Asia's fourth-largest economy is likely to fall into a prolonged low-growth trap following in the footsteps of Japan's decades-long slump.

This is the consensus view among five renowned economists that The Korea Times interviewed for its New Year Special to see the future course of the Korean and global economies.

Park Chong-hoon, chief economist at Standard Chartered Bank, said the current low growth will continue much longer than previously projected given the lack of growth momentum compounded by lingering risk factors both here and abroad.

“The economy is not likely to have a V-shaped turnaround, because there is no certainty that would help growth prospect while the only prevailing certainty is that the country will be hit by a myriad of uncertainties,” Park said.

He agrees with the other economists interviewed that Korea's economy will grow in 2019 at a rate much slower than expected, with all of them projecting the rate will fall between 2.4 percent and 2.7 percent.

This is bleaker than 2.7 percent for 2018 and 2019, outlooks made by the Bank of Korea (BOK) in October. The BOK said the country's potential growth rate will be between 2.8 percent and 2.9 percent between 2016 and 2020.

The economists largely agreed that the biggest risk factor to the grim growth outlook remains the policy failures of income-led growth spearheaded by the Moon Jae-in administration.

The signature economic policy involved income-led growth defined by a rapid hourly minimum wage hike and reducing working hours to 52 from 68 per week.

The major labor cost “shock” strained not only large conglomerates but also many small- and medium-sized enterprises (SMEs).

“Although we need not an extreme course correction, an honest acknowledgement and revision is required to push it steadily through while limiting the side effects observed thus far, especially concerning the minimum wage hike,” said Oh Suk-tae, an economist at Societe Generale.

The 2019 minimum hourly wage was set for 8,350 won ($7.40), up 10.9 percent from 2018's 7,530 won, which was a 16.4 percent increase from 6,470 won in 2017.

“We now have a position of strength and wisdom given we have learned a lot from past mistakes, which should be addressed in in-depth discussions in the coming months. The government also needs to launch construction projects to bolster the stagnant industry,” Oh said.

The Moon administration should continue with the expansionary monetary policy to see improvements in employment, investment and consumer confidence, said Ryu Deock-hyun, an economics professor at Chung-Ang University.

“Investment sentiment and consumer confidence remain stagnant despite the government's monetary spending. The government should prioritize reinvigorating the economy by fiscal policy, which should be equally pursued with a structural reform to streamline corporate management and boost competitiveness, which inevitably will draw massive protests from labor groups.”

The Moon administration should prioritize improving the livelihoods of the people over seeking accountability under the name of “removing old evils,” mostly targeting previous right-wing administrations, said Lee Chae-woong, a professor emeritus of economics at Sungkyunkwan University.

“The efficacy of economic policy will be rendered in vain if the government allocates resources without having its priorities straight. Moon should think about the people first,” Lee said.

US-China trade feud

Many of them said the ongoing U.S.-China trade tension will continue without any clear end in sight, given the hegemony-oriented nature of the power struggle between the world's two largest economies.

“The conflict will continue for an extended period of time, because it is not about a mere trade deficit, and much more about the dispute over the technology, goods and services for the generations to come,” Park said.

The conflict will move from import tariffs to export bans, according to Alicia Garcia-Herrero, Asia Pacific chief economist at Natixis Global Market Research.

“This is already happening for Hong Kong as the U.S. is rethinking its exemption on Hong Kong for high-tech exports. In addition, we could also see additional weaponization of sanctions by the U.S. beyond the current case with Huawei. This will restrict the operations of Chinese companies in countries that are considered clear U.S. allies,” she said.

Four economists said the BOK will freeze its key rate in 2019 at 1.75 percent, while the U.S. Federal Reserve will at least twice or up to four times.

Only Park of the Standard Chartered Bank said a BOK rate hike would come in the third quarter, conditioned on the U.S. Fed raising its key rate twice in 2019.

Garcia-Herrero said based on their outlook, the BOK's November hike was “the end of Korea's hiking cycle.”

The house view, she added, based on the December Forecast Table, is that the U.S. Fed is expected to hike the rate to 2.75 percent in March 2019 and 3 percent in June 2019.

Most of the economists maintained a negative view on the growth outlook of the U.S. and China.

Park of Standard Chartered Bank said the U.S. will grow at a rate of 2.6 percent in 2019 and China at 6.4 percent, while Garcia-Herrero said the rates will be 2.4 percent and 6.3 percent, respectively.

“We have some moderation in growth projection concerning the two countries. However, a 6.3 percent growth rate for China should be read as good news as the consensus is quite negative. Our outlook on China is relatively better based on the expectation of an infrastructure-led fiscal stimulus and also a more forceful transfer of financing to the private sector and an administered lowering of private sector financial costs,” Garcia-Herrero said.