{"id":2197140,"date":"2022-06-30T20:07:57","date_gmt":"2022-06-30T11:07:57","guid":{"rendered":"https:\/\/www.nknews.org\/pro\/?p=2197140"},"modified":"2023-04-05T16:12:13","modified_gmt":"2023-04-05T07:12:13","slug":"as-inflation-worsens-south-korea-braces-for-perfect-storm-of-economic-woes","status":"publish","type":"post","link":"https:\/\/koreapro.org\/2022\/06\/as-inflation-worsens-south-korea-braces-for-perfect-storm-of-economic-woes\/","title":{"rendered":"As inflation worsens, South Korea braces for \u2018perfect storm\u2019 of economic woes"},"content":{"rendered":"

There has been a noteworthy shift in South Korean political and economic messaging in recent months. Largely gone is the idea that the country will be able to pass through what looks like an inevitable period of economic pain without major incident.\u00a0<\/span><\/p>\n

Last November, South Korea was predicted to enjoy 4% growth in gross domestic product (GDP) for 2022. That declined to 3% in February and now sits at <\/span>2.7%<\/span><\/a>. That also seems increasingly optimistic and is due mostly to growth that already happened in the first three months of the year.\u00a0<\/span><\/p>\n

Inflation is also expected to <\/span>tip 6%<\/span><\/a> in short order, and Financial Supervisory Service Governor Lee Bok-hyun has talked of a \u201c<\/span>perfect storm<\/span><\/a>\u201d just over the horizon.\u00a0<\/span><\/p>\n

Lee\u2019s warning reflects a stark realization: Korea is in fact more vulnerable than many other developed economies to some of the immediate risks the world economy faces, among them inflation in energy and raw material inputs for the country\u2019s export-driven economy, deteriorating interest and exchange rates and exposure to sluggishness in China.<\/span><\/p>\n

ECHOES OF THE 70s<\/b><\/p>\n

The <\/span>specter of inflation<\/span><\/a> now looms large over Seoul, just as it does in much of Western Europe and North America.<\/span><\/p>\n

The obvious touchstone for comparison is the 1970s. This may seem curious: Korea in the 1970s is almost always remembered as a place that enjoyed very rapid annual growth and rising incomes, understandably so given the <\/span>stunning successes that the country\u2019s Economic Planning Board<\/span><\/a> led during that and the preceding decade.\u00a0<\/span><\/p>\n

However, the country was far from immune to the economic turmoil that struck when the Yom Kippur War in late 1973 compounded the collapse of the Bretton Woods system and subsequent stock market crash, catalyzing the first of the era\u2019s major energy crises. Economic disequilibria led gross national product (GNP) growth into negative territory, unemployment rose and the country faced difficulties servicing its external debts for a time. The worst impacted were the urban poor, who found themselves on the wrong side of dramatically increasing income polarization.\u00a0\u00a0<\/span><\/p>\n

As an export-driven manufacturing economy with very limited natural resources, Korea was as heavily dependent on imports of energy and other raw materials in the 1970s as it is today (although thankfully the <\/span>energy intensity<\/span><\/a> of GDP is much lower now). The cost of these imports became a serious concern once global conditions worsened.<\/span><\/p>\n

In 1974, earnings from exports rose 22% year on year but the cost of imports rose by twice as much \u2014 46%. The country had to absorb a net additional burden of no less than 6% of GNP in its import costs as a consequence.<\/span><\/p>\n

Seoul predicted that unemployment would hit 6%. While that did not happen thanks to an unexpectedly quick economic rebound in 1976, a second energy shock starting with the Iranian revolution in Jan. 1979 saw a rerun of the same basic dynamic. Living costs rose by 25-30% in 1979 and 1980 while wages rose by only 12%, and this time unemployment really did reach 6%.<\/span><\/p>\n

The economic recession brought on by the second oil shock contributed to the assassination of Park Chung-hee in Oct. 1979, a factor often overlooked but one that cannot be downplayed.\u00a0\u00a0<\/span><\/p>\n

\"\"

A gas station in Seattle is closed during the 1970s energy crisis | Image: Seattle Municipal Archives via Wikimedia Commons<\/a> (CC BY 2.0<\/a>)<\/p><\/div>\n

HISTORY REPEATS<\/b><\/p>\n

The world stands on analogous ground today.\u00a0<\/span><\/p>\n

Developed economies face a period of <\/span>stagflation<\/span><\/a> brought on by the realization, primarily but by no means exclusively in the U.S., that inflation has seeped into all corners of the economy and cannot be brought under control in the absence of firm intervention by the U.S. Federal Reserve and other major central banks.\u00a0<\/span><\/p>\n

Yet again, Korea\u2019s import prices are rising more quickly than its export earnings \u2014 36.3% per year versus 23.5%. And this means the country is going to have to absorb another hit to cover the difference.\u00a0<\/span><\/p>\n

Strong unionized labor raises the risk of collective demands for higher wages resulting in a <\/span>wage-price spiral<\/span><\/a>, something the Bank of Korea <\/span>flagged back in April<\/span><\/a>. As inflation starts to bite, the impact of rising borrowing costs could prove significant given that household debt in Korea runs at an average of more than 200% of net disposable income.<\/span><\/p>\n

Finally, and here parallels with the 1970s end, a key risk variable is South Korea\u2019s particularly high degree of exposure to China. <\/span>Research by the Bank of International Settlements<\/span><\/a> indicates that the South Korean economy has historically responded to a 1 percentage point decline in Chinese GDP growth with a 1 percentage point decline of its own (figures for the Eurozone, Japan and U.S. are much lower at around a quarter of a percentage point). Given the <\/span>World Bank predicts<\/span><\/a> Chinese growth to slow to well below 5 percent in 2022, that kind of exposure is bad news.<\/span><\/p>\n

During the global financial crisis after 2008, China emerged as part of the solution, but today, mired in a combination of political and public health troubles, Beijing looks a lot like part of the problem.<\/span><\/p>\n

SILVER LININGS<\/b><\/p>\n

The bright side is that there are some welcome differences between now and the 1970s.<\/span><\/p>\n

Back in 1974, the Korean government responded to the first oil shock and subsequent stagflation by lowering income taxes and subsidizing fertilizer and food. It also leaned on the country\u2019s emerging industrial conglomerates to limit layoffs and forestall a precipitous rise in unemployment. That was more or less all it was capable of.\u00a0<\/span><\/p>\n

Today\u2019s prescription is certain to be different, and Seoul has much more room for maneuver. Thanks to sound economic policies since the turn of the century, Seoul has healthy fiscal headroom to deploy on additional spending. The country currently has around $450 billion in foreign exchange reserves, and as of 2019 spent a comparatively anemic 12.2% of GDP on welfare costs.<\/span><\/p>\n

The current economic challenges also look more manageable than those of half a century ago. In 1975, Korean consumer price inflation topped 25%, and recent energy prices look modest by comparison.<\/span><\/p>\n

Moreover, this time around the Korean government moved early to tackle signs of distress in the economy. Showing impressive clarity of purpose, the Bank of Korea has increased the interest rate by 25 basis points on five occasions since last August. <\/span>Taxes on fuel have been reduced three times<\/span><\/a> since November in an (admittedly unsuccessful) attempt to keep gasoline at the pump below the psychologically important 2,000-won mark.<\/span><\/p>\n

Regulators have also been watching the liquidity of the country\u2019s banks like hawks, and there are clear signals that the government is ready to funnel fresh liquidity to not only banks should it become necessary, but also indebted firms.<\/span><\/p>\n

Notwithstanding the moral hazard implied in this last measure, government attentiveness is a net positive. It may even allow South Korea to make a soft landing that does not end with a recession.<\/span><\/p>\n

Certainly, the government seems aware that, as <\/span>the Bank for International Settlements succinctly put it<\/span><\/a>, \u201cThe long-term costs of allowing inflation to become entrenched far outweigh the short-term ones of bringing it under control.\u201d<\/span><\/p>\n

But the odds of a truly soft landing are rather slim. Even if the worst does not come to pass in the next 12-18 months, the Korean economy, exposed to many of the worst risk variables in play, will need further help as calls get louder for direct government intervention to ease the pain.<\/span><\/p>\n

Edited by Bryan Betts<\/span><\/i><\/p>\n

Business & Economy<\/span><\/a>Culture & Society<\/span><\/a><\/div>","protected":false},"excerpt":{"rendered":"

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Largely gone is the idea that the country will be able to pass through what looks like an inevitable period of economic pain without major incident.\u00a0 Last November, South Korea was predicted to enjoy 4% growth in gross domestic […]<\/p>\n","protected":false},"author":3665,"featured_media":2197166,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"inline_featured_image":false,"footnotes":""},"categories":[21],"tags":[24,25],"yoast_head":"\nAs inflation worsens, South Korea braces for \u2018perfect storm\u2019 of economic woes - KOREA PRO<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/koreapro.org\/2022\/06\/as-inflation-worsens-south-korea-braces-for-perfect-storm-of-economic-woes\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"As inflation worsens, South Korea braces for \u2018perfect storm\u2019 of economic woes - KOREA PRO\" \/>\n<meta property=\"og:description\" content=\"There has been a noteworthy shift in South Korean political and economic messaging in recent months. 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