By Choi Kyong-ae
Over the past year, the nation's economy has struggled in the aftermath of the tragic Sewol ferry sinking.
It still has a lingering effect on consumer spending and corporate investment even a year later.
The ship sank due to a combination of structural problems brought on by corruption and lax observation of regulations. The country's economy meanwhile is stuck with the same old structural problems, analysts say.
"The Sewol tragedy took place as operators paid the most attention to making profits but the least attention to safety. The man-made incident has wreaked havoc on the country's spending since April last year," said Yun Chang-hyun, professor of finance at the business administration division of University of Seoul. "The impact on the economy is still ongoing."
Most of the country's tragic incidents came due to lack of standards in manufacturing, mismanagement by operators or little attention to monitoring and safety checks, said the professor who served as chief of the state-funded Korea Institute of Finance.
Side effects after rapid growth
Over a very short period of time, Korea has grown from the ashes of the Korean War from 1950-1953 to emerge as Asia's fourth-biggest economy largely by pushing all the development process hard and fast, a visiting professor of economics at Seoul National University, said Wednesday.
"The country now faces the so-called side effects of decades of rapid development in the form of these kind incidents. The incidents have dampened domestic spending, and are not supporting growth," Lee said.
Economists and business people said the current sluggish demand does not have a direct link with the Sewol ferry sinking which took 304 lives, including 250 high school students on a field trip to Jeju Island on April 16 of last year.
But that scar remains on the minds of consumers, they said.
The sinking of the Sewol which was carrying 476 people when it sank off the southwest coast of Korea was blamed on the ship's illegal redesign and overloading. It was also due to the country's relentless push for economic growth in past decades, resulting in deep-rooted problems of corruption, lax safety standards and regulatory failings.
In the eight months after the tragedy, businesses vulnerable to consumer sentiment were hit the hardest. Department stores and retail companies saw their earnings plunge compared to the year before.
Lotte Shopping, which operates the country's biggest department store, large discount store, supermarket and cinema chains, hit the headwind. It posted declining net profits in the three years from 2012 to 2014. Its net profit continued to fall to 615.72 billion won ($562 million) in 2014, down 47 percent from 1.158 trillion won in 2012, according to a regulatory filing.
The retail giant does not see any significant improvement in consumer spending this year.
"Consumers are not opening their wallets despite lower interest rates and improving property prices helped by the government's stimulus measures announced in August last year. People buy or rent a house with a bank loan and their living expenses are on the rise. They are under heavy debt. So they spend largely on daily necessities," a Lotte Shopping official said.
E-mart, the discount store chain unit of another retail conglomerate Shinsegae, also posted a net profit of 291.9 billion won in 2014, down 33 percent from 435.1 billion won in 2012, according to another regulatory filing.
This year, the retail companies said things have not improved compared to a year before.
The ferry incident's impact on the economy was so grave that consumption and investment still remain sluggish this year. Worse still, people's spending does not show signs of recovery due to increases in debts and living costs, a Shinsegae official said.
The officials from Lotte and Shinsegae asked not to be identified.
Household loans by depository corporations jumped to 750.3 trillion won at the end of February from 688.1 trillion won a year earlier, according to the Bank of Korea (BOK). Depository corporations include commercial banks, merchant banks, the National Credit Union Federation of Korea and the Korean Federation of Community Credit Cooperatives.
"Helped by the finance ministry's measures to boost the real estate market, a lot of mortgage loans were extended in recent months," a BOK official said. Citing BOK Governor Lee Ju-yeol's comments last week, he said the bank expects its recent rate cuts have begun to support the economy.
But economists didn't agree with the governor's view. They said spending has not recovered as much as anticipated despite the central bank's three rate cuts since August in line with the ministry's stimulus initiative. They expect another rate cut in the third quarter.
The BOK currently has a benchmark interest rate at an all-time low of 1.75 percent. The state bank recently cut its growth and inflation forecasts for this year due to weak exports and growing downside risks such as slowdown in China and the won's strength against the dollar.
In its revised outlook, it projects the economy will grow 3.1 percent in 2015, down from its January forecast of 3.4 percent. It cut inflation projections to 0.9 percent from 1.9 percent.
Solutions to bearish spending
This year, the stock and the real estate markets appear to get a boost due to increased liquidity following monetary easing policies. But the recovery is only limited to the financial sector, economists said.
"Deflation is going on in the real economy. Consumer prices and exports continued to fall more than expected this year. An unbalanced recovery is not a recovery," Professor Lee at Seoul National University said.
Lee asked the government to take three measures to revive spending: creating jobs to give opportunities to work for jobseekers and allowing workers to share jobs by adopting the wage peak system which pays less to elderly workers over their last several years at work instead of extending their retirement age to 60 from the current ages ranging from 53 to 58.
Thirdly, he said, "companies should increase their expenditure on research and development activities not only to offer jobs to young people, but also to generate new growth engines."
Lee and other economists see an increasing demand for the government's supplementary budget to ultimately increase the disposable income in households.
"It seems reasonable for the finance ministry to inject more money to put the economy back on track by executing its planned budget or budgeting more. Pressuring the central bank to cut rates further is an alternative option," Foreign Investment Ombudsman's Dr. In-Chul Kim said.
Foreign Investment Ombudsman, established in 1999, is an in-house organization of the Korea Trade-Investment Promotion Agency to attract foreign investment. Kim was appointed by President Park Geun-hye.
Over the past year, the nation's economy has struggled in the aftermath of the tragic Sewol ferry sinking.
It still has a lingering effect on consumer spending and corporate investment even a year later.
The ship sank due to a combination of structural problems brought on by corruption and lax observation of regulations. The country's economy meanwhile is stuck with the same old structural problems, analysts say.
"The Sewol tragedy took place as operators paid the most attention to making profits but the least attention to safety. The man-made incident has wreaked havoc on the country's spending since April last year," said Yun Chang-hyun, professor of finance at the business administration division of University of Seoul. "The impact on the economy is still ongoing."
Most of the country's tragic incidents came due to lack of standards in manufacturing, mismanagement by operators or little attention to monitoring and safety checks, said the professor who served as chief of the state-funded Korea Institute of Finance.
Side effects after rapid growth
Over a very short period of time, Korea has grown from the ashes of the Korean War from 1950-1953 to emerge as Asia's fourth-biggest economy largely by pushing all the development process hard and fast, a visiting professor of economics at Seoul National University, said Wednesday.
"The country now faces the so-called side effects of decades of rapid development in the form of these kind incidents. The incidents have dampened domestic spending, and are not supporting growth," Lee said.
Economists and business people said the current sluggish demand does not have a direct link with the Sewol ferry sinking which took 304 lives, including 250 high school students on a field trip to Jeju Island on April 16 of last year.
But that scar remains on the minds of consumers, they said.
The sinking of the Sewol which was carrying 476 people when it sank off the southwest coast of Korea was blamed on the ship's illegal redesign and overloading. It was also due to the country's relentless push for economic growth in past decades, resulting in deep-rooted problems of corruption, lax safety standards and regulatory failings.
In the eight months after the tragedy, businesses vulnerable to consumer sentiment were hit the hardest. Department stores and retail companies saw their earnings plunge compared to the year before.
Lotte Shopping, which operates the country's biggest department store, large discount store, supermarket and cinema chains, hit the headwind. It posted declining net profits in the three years from 2012 to 2014. Its net profit continued to fall to 615.72 billion won ($562 million) in 2014, down 47 percent from 1.158 trillion won in 2012, according to a regulatory filing.
The retail giant does not see any significant improvement in consumer spending this year.
"Consumers are not opening their wallets despite lower interest rates and improving property prices helped by the government's stimulus measures announced in August last year. People buy or rent a house with a bank loan and their living expenses are on the rise. They are under heavy debt. So they spend largely on daily necessities," a Lotte Shopping official said.
E-mart, the discount store chain unit of another retail conglomerate Shinsegae, also posted a net profit of 291.9 billion won in 2014, down 33 percent from 435.1 billion won in 2012, according to another regulatory filing.
This year, the retail companies said things have not improved compared to a year before.
The ferry incident's impact on the economy was so grave that consumption and investment still remain sluggish this year. Worse still, people's spending does not show signs of recovery due to increases in debts and living costs, a Shinsegae official said.
The officials from Lotte and Shinsegae asked not to be identified.
Household loans by depository corporations jumped to 750.3 trillion won at the end of February from 688.1 trillion won a year earlier, according to the Bank of Korea (BOK). Depository corporations include commercial banks, merchant banks, the National Credit Union Federation of Korea and the Korean Federation of Community Credit Cooperatives.
"Helped by the finance ministry's measures to boost the real estate market, a lot of mortgage loans were extended in recent months," a BOK official said. Citing BOK Governor Lee Ju-yeol's comments last week, he said the bank expects its recent rate cuts have begun to support the economy.
But economists didn't agree with the governor's view. They said spending has not recovered as much as anticipated despite the central bank's three rate cuts since August in line with the ministry's stimulus initiative. They expect another rate cut in the third quarter.
The BOK currently has a benchmark interest rate at an all-time low of 1.75 percent. The state bank recently cut its growth and inflation forecasts for this year due to weak exports and growing downside risks such as slowdown in China and the won's strength against the dollar.
In its revised outlook, it projects the economy will grow 3.1 percent in 2015, down from its January forecast of 3.4 percent. It cut inflation projections to 0.9 percent from 1.9 percent.
Solutions to bearish spending
This year, the stock and the real estate markets appear to get a boost due to increased liquidity following monetary easing policies. But the recovery is only limited to the financial sector, economists said.
"Deflation is going on in the real economy. Consumer prices and exports continued to fall more than expected this year. An unbalanced recovery is not a recovery," Professor Lee at Seoul National University said.
Lee asked the government to take three measures to revive spending: creating jobs to give opportunities to work for jobseekers and allowing workers to share jobs by adopting the wage peak system which pays less to elderly workers over their last several years at work instead of extending their retirement age to 60 from the current ages ranging from 53 to 58.
Thirdly, he said, "companies should increase their expenditure on research and development activities not only to offer jobs to young people, but also to generate new growth engines."
Lee and other economists see an increasing demand for the government's supplementary budget to ultimately increase the disposable income in households.
"It seems reasonable for the finance ministry to inject more money to put the economy back on track by executing its planned budget or budgeting more. Pressuring the central bank to cut rates further is an alternative option," Foreign Investment Ombudsman's Dr. In-Chul Kim said.
Foreign Investment Ombudsman, established in 1999, is an in-house organization of the Korea Trade-Investment Promotion Agency to attract foreign investment. Kim was appointed by President Park Geun-hye.
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