The nation’s growth engine is losing power at a rapid pace.
The Korean economy grew 0.4 percent in the second quarter from the previous one, less than half the 0.9 percent growth in the January-March period. The outlook for the third quarter is grimmer with some pessimistic analysts forecasting a contraction.
Last week, the Korea Economic Research Institute (KERI) revised down its 2012 growth forecast for Asia’s fourth-largest economy to 2.6 percent from its earlier projection of 3.2 percent. If the growth rate is to be kept above 3 percent this year, the economy should expand by more than 3.3 percent in the second half. But this will be all but impossible.
Most worrisome is that low growth may become a norm for this country, which has achieved an economic miracle from the ashes of the 1950-53 Korean War. That is, the nation is facing the risk of plunging into an L-shaped long downturn.
Both exports and domestic demand are stagnant. Exports, the prime engine of the Korean economy, contracted 8.8 percent in July, the biggest year-on-year drop since October 2009, due to the lingering debt crisis in Europe and a protracted slowdown in the U.S. and China.
Domestic demand is also mired in a slump as households, saddled with suppressing debt burdens and low incomes, tighten their belts. Retail sales in June were down 0.5 percent from May. In particular, sales at the country’s major discount outlets and department stores shrank last month, particularly affected by an unusual heat wave that caused shoppers to stay at home. What’s certain is that households tend to hold off spending in the face of uncertain economic conditions.
All this explains why policymakers should be on alert with firm determination. Given that job creation is directly linked to growth, all means available should be mobilized to replenish the nation’s growth potential. In this regard, the central Bank of Korea deserves praise for its unexpected rate cut in July in an apparent bid to prop up the sagging economy.
Of course, the government should draw up and implement a comprehensive package of measures aimed at injecting fresh vigor into exports and domestic consumption. These will include diversifying export markets, spurring the advancement of service industries and dismantling red tape across the board. Removing uncertainties will also be essential to boosting corporate investment.
What’s paramount is that politicians should refrain from making sugar-coated unrealistic pledges ahead of the December presidential election.