Imminent Downside Risks
The economic slowdown is turning into reality. Not only the Korean government but also the Bank of Korea has adjusted its economic growth forecast for this year downward to a large extent.
Economic experts are predicting that the second economic team of the government will focus more on growth rather than reform in economic policy management from now on, with emerging economies such as China signaling a slower pace of growth to affect Korean exporters and its domestic market alike.
The Bank of Korea cut its growth rate estimate for 2014 from 4.0 percent to 3.8 percent on July 10 and, for 2015, from 4.2 percent to 4.0 percent. Also, it lowered the inflation forecasts for the next two years from 2.1 percent to 1.9 percent and from 2.8 percent to 2.7 percent, respectively.
The downward adjustment is based on concerns over the tapering by the U.S. Fed and sluggish domestic consumption. Central Bank Governor Lee Ju-yeol remarked that various downside risks are imminent in the Korean economy, as the global economy is slowing down to portend deteriorating consumer sentiment and real economic indices.
Nowadays, a variety of economic indices constituting the GDP are showing signs of instability, ranging from household consumption and corporate investment to trade balances.
The recession-type surplus that has continued for 27 months is one of the biggest problems with the Korean economy. According to the central bank, Korea recorded US$9.3 billion in current account surplus in May and US$31.5 billion during the first five months of this year. Experts are increasingly concerned over the recession-type surplus following a decrease in imports.
The manufacturing sector is losing steam at the same time. The Ministry of Strategy and Finance and Statistics Korea recently announced that the service industry production index went up from 106.4 to 108.4 in May, but mining and manufacturing production fell 2.7 percent from 111.8 to 107.9 during the same month.
The consumer sentiment is showing no signs of improvement either. The total household deposits in local banks amounted to 521.2 trillion won (US$511.1 billion) as of the end of April, the highest ever since the publication of the first statistics in 1975 and more than 41 trillion won (US$40.3 billion) from a year earlier. The real interest rate allowing, for the inflation rate, is zero these days. The increase in deposits, then, implies that more and more people are refraining from investment due to the lack of attractive targets.
Under the circumstances, private-sector institutes are lowering their estimates one after another, too. For instance, the Korea Development Institute adjusted its forecast from 3.9 percent to 3.7 percent, the Korea Institute of Finance from 4.2 percent to 4.1 percent, and the Korea Economic Research Institute from 3.5 percent to 3.4 percent.
The Korean government has carried out its economic policy on the assumption that a high exchange rate would result in greater competitiveness on the part of exporters and a trickle-down effect for at least some recovery in domestic consumption. Still, sluggish consumption has been exacerbated despite increasing exports, while the concentration of wealth is accelerated along with income inequality.