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Outlook of Korean economy for the New Year is not all that badPositive and negative views on the Korean economy for 2015

Where is the Korean economy is headed? Many economic research institutes and pundits give a gloomy forecast for the New Year (and beyond), citing unfavorable financial situations in other countries that could exert a bad influence on the Korean economy.

▲Bank of Korea. Any further lowering of the interest rates is expected to need a thorough study by the Money Policy Committee of the Bank of Korea of its favorable impact on the stimulation of the economy and also on the negative influence on the stability of the financial market.

At the same time, however, there are economic experts who caution the danger of making overly pessimistic views on the Korean economy.

Here are typical examples of the optimists and pessimists on the outlook of the Korean economy:

President Choi Yong-sik of the Turning Age Economics Research Institute says that times are changing quickly and Korea is running behind in adapting itself to the rapidly changing surroundings of the economy, industry and finance around the world.

“What can Korea live on in ten years after?” questions President Choi.

“When you travel to different countries,” says Choi, “you come across some big cities which once were very prosperous but which are now in such a shabby shape that you wonder if these cities did really have such a good time in the past.” Choi concludes that these cities have failed to adept themselves to the changing times and should have found new areas for development for continued growth.

Economic Editor Kwon Ku-chan of Seoul Economic Daily says that the economic indicators of Korea for the New Year are all in ‘grey figures’ meaning that the ‘skies are cloudy instead of clear and bright.’

“Most of the economic research institutes forecast the economic growth rate of Korea in the New Year to be at three points and half and this, too, is on condition that nothing bad happens throughout the year,” says Kwon.

▲The Federal Reserve Bank of The United States. The Bank has indicated that it would raise the interest rates next year which may be viewed to be another unfavorable indicator.

Kwon says that in the case of Korea Development Institute forecast there are possibilities that the economy will be worse in the New Year than it is now and that possibilities are very low that it would be better than this year.

Donga Ilbo recently reported that Korea faces a ‘Ten-Year Period of Slow Economy’ and that this is because the world economy is stagnant and Korea is one of the first countries to be affected by it because the Korean economy is dependent on export and Korea cannot expect a good time when the export markets are in a bad shape.

Donga enumerates the unfavorable points: (1) Japan has a good price competitiveness as it has lowered the value of the Yen, (2) Europe is facing a third financial crisis, (3) China [Korea’s largest export market] is lowering its economic growth rate, (4) the oil prices are falling and (5) some newly developing countries are facing economic difficulties.

At this juncture, a Korean economic expert countered such pessimistic views, and gave a warning that Korea must take care not to be adversely affected by such negative predictions.

He is Senior Economist Kwon Koo-hoon at Goldman Sachs who disclosed that the United States is expected to make a 3% growth in the New Year and that China, too, will see a 7% growth.

In an article published by Chosun Ilbo and a number of other media on Dec. 19, 2014, Kwon says that the low oil price, too, will not necessarily hurt the Korean economy because it could do some good to the world economy.

▲The value of the Korean Won will stay low giving impetus to the export industry and there also are signs of improvement in the housing construction industry and domestic consumption.

Then he said that the value of the Korean Won will stay low giving impetus to the export industry and that there are signs of improvement in the housing construction industry and domestic consumption.

In order to improve the Korean economy, however, Kwon recommended that the government should reduce restrictions, reform the services industry and take steps to stimulate the housing industry.

Excerpts from Kwon’s warning follow:
It appears that, in forecasting the world economic outlook for the New Year, pessimistic views seem to prevail. Economic uncertainties in Japan and Europe seem to loom large and some of the resources-exporting countries are having a bad time due to the fall of the oil prices that are exerting an unfavorable influence on the financial market of the world.

The latest economic indicators of China are not very promising and lowering of the interest rates may be pessimistically viewed.

The Federal Reserve Bank of the United States indicated last week that it would raise the interest rates next year which may be viewed to be another unfavorable indicator.

All in all, pessimistic views on the outlook of the economy in the New Year seem to derive from the fact that the world economic growth for the past three years remained short of 3%.

Outlook of the Korean economy, too, is not all that bright. Since the sinking of the Sewol Ferry in April this year, consumption has fallen and recovery of the consumer sentiment has been very slow. Investment has also been very weak.

In contrast, the household debts, which are compared to ‘Hypertension of the Korean Economy,’ have resumed increasing.

Change in the population composition also contributed to the gradual drop of the economic vitality and restructuring to cope with this situation is slow in coming.

Some of the heavy chemical industries are facing threats from the change of the basic policies of China and improvement of such industries of that country.

Lawbills for the restructuring and economic stimulation still remain on the shelves of the National Assembly--unattended.

As if to reflect their responses to this situation, the Korean stock market shows the poorest performance this year.

Such existing factors notwithstanding, however, outlook of the Korean economy for the New Year is not all that bad.

More important than anything else, the speed of recovery of the world economy is expected to gain.

The US economy, the largest in the world, is growing nearly 3% which is far higher than the forecast potential growth rate of 2%. In the New Year, too, the US economy is expected to grow 3% thanks to the improvement in employment and 10% growth rate forecast for the construction industry.

▲Oil prices have been falling at a rapid place and on a significant scale hurting the economy of the oil producing countries.

China, too, is expected to continue economic restructuring and maintain a steady growth of 7%.

The United States and China, who account for one third of the world economy, are expected to lead one half of the economic growth of the world that is estimated at 3% in the New Year.

The low price of oil that came as a result of the technological renovation of Shale Gas is expected to favorably affect the economy of the world.

The interest rates of the US Federal Reserve Bank will be increased, but it is expected to happen in the second half of next year due to the low rate of inflation. Any additional interest rate increases will be gradually attempted compared with the past examples.

In Korea, the low Korean Won and the existing pump-priming policies are expected to have a favorable impact on the recovery of the domestic economy.
The trend of the strong dollars vis-a-vis the low Won is expected to continue into the latter half of the New Year. The value of the Won is expected to come further down by 7 to 10% compared with this year, which will greatly help the export industry and export-related industries in their sales and revenue.

The Korean exports this year increased a little on the basis of the dollars but dropped calculated on the basis of the Korean Won. The weak Korean Won should be considered a meaningful (welcome) development considering the fact that the exchange rates were a burden on Korea this year compared with other countries of Asia.

The point-five-percent (0.5%) lowering of the interest rates in the second half of this year and the consistent construction market normalization policies of the Korean government will help the recovery of the domestic demand and the newly opened exchange market of the Chinese Yuan in Korea are expected to contribute to stimulating the Korean exports to China and improve the competitiveness of the Korean exporters to China.

▲Export industry can rely on the improving market in the United States and China.

Favorable and unfavorable factors co-exist in the Korean economy in the New Year, and this situation can favorably affect the effort of the government to carry out the structural reforms.

To deal with the economy in the New Year, new economic stimulation policies may be useful, but it is more important for the government to carry into practice the existing stimulus package.

The normalization effort for the real estate market must continue through legislation of related laws and there must be visible results of the government effort for improving the dividend distribution.

The new Yuan exchange market in Korea is expected to gain its vigor and if the new situation increases Korean investment in overseas financial market it will help maintain the low rate of the Korean Won.

Any further lowering of the interest rates is expected to need thorough studies by the Money Policy Committee of the Bank of Korea of its favorable impact on the stimulation of the economy and also the negative influence on the stability of the financial market.

Additional lowering of the interest rates in Korea does not seem to be easy because of its unfavorable impact on the household debts although it has favorable influence on the pump-priming policy.

이경식 기자  edt@koreapost.com

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