The South Korean economy is facing numerous concerning indications, further darkening the chances of a rapid revival. To begin with, the U.S. Federal Reserve chose to maintain its lending rates in a range of 5.25 percent to 5.5 percent on Wednesday, and kept a strict attitude. Major international economic research institutes anticipate that the Korean economy is likely to suffer setbacks this year and will have a lower growth rate than other countries.
Fed Chair Jerome Powell highlighted the need to raise the rate once more to control inflation, which has not shown any signs of decreasing despite a short break. Primarily driven by escalating oil prices, U.S. inflation rose to 3.2 percent in July and 3.7 percent in August.
The Fed’s temporary pause will likely have a far-reaching negative effect on the already-struggling Korean economy, with signs already appearing in the stock and foreign exchange markets. The exchange rate of the Korean won against the dollar rose to 1,341 won on Thursday, although it began to gain a slight advantage later.
The Fed’s current move has placed the Bank of Korea (BOK) in a fresh predicament. The BOK is likely to follow the Fed’s lead, freezing the rate again, in fear of a further widening of the interest rate gap with the U.S. The BOK’s possible rate hike will accelerate the depreciation of the Korean won and trigger a possible outflow of foreign investments. Prolonged high interest rates will thus increase debts on insolvent businesses such as real estate project financiers and savings banks.
The financial authorities should double down on stopping the stringent U.S. policies from disturbing the financial markets in Korea. Adding to the worries, household debt is continuing to rise and oil prices are soaring. The government has been unable to employ pump-priming measures to instigate the economy, primarily due to the anticipated tremendous decrease in tax revenue by 59 trillion won (US$44 billion) from a year earlier.
The OECD has estimated Korea’s economic growth rate at 1.5 percent this year, the same as it predicted in June. In comparison, it forecast the global economy will grow 3 percent, up from an earlier projection of 2.7 percent. It said Japan will likely see 1.8 percent growth, half a percentage point higher than its previous outlook. The Asian Development Bank (ADB) also said on Thursday that Korea’s economy will likely grow only 1.3 percent this year.
The OCED pointed out that if high interest rates and soaring oil prices remain, they will intensify inflationary pressure. This will cause further setbacks on the Korean economy, such as surging household debt, sluggish consumption and financial crunches for enterprises. It also cited a potential economic recession in China as a potential risk factor.
The Korea International Trade Association (KITA) said the Export Business Survey Index (EBSI) will reach only 90.2 in the fourth quarter, showing dismal prospects facing Korean enterprises. An EBSI lower than 100 signifies that businesses with a pessimistic outlook on future exports outnumber those with a positive view.
There are some positive signs such as a slight improvement in consumer sentiment paired with growing employment. Chinese tourists are coming back, while exports of some major products like semiconductors are showing signs of recovering.
Nevertheless, many difficulties overshadow the positive elements, such as, among others, surging consumer prices, which climbed to 3.4 percent in August. Soaring oil prices will likely add fuel. It is high time for the government to focus on revitalizing exports, investments and consumption.
It should step up efforts to eliminate various regulations standing in the way of investments and exports. Instead of rosy prospects, it should assess the current situation sternly. It should help enterprises, now suffering from high interest rates, to turn their attention to corporate restructuring. The International Monetary Fund (IMF) recommended in its 2023 annual report that Korea should accelerate much-touted labor and pension reforms.