From the beginning of the year, Korea sees troubling signs for the economy. The Korean economy grew 2.7 percent last year, making the slowest on-year growth in six years. The local economy has aimed at growth of the 3 percent range since it expanded 3.1 percent in 2017, but it failed to meet the target level last year. Here’s Kim Jeong-sik, economics professor at Yonsei University, to analyze why the Korean economy was stuck in the slow growth rate in 2018 and how it can improve the situation.
While exports remained strong last year, domestic demand fell drastically. Construction and corporate facility investment, in particular, remained sluggish. Private firms were reluctant to make an investment due to the unfavorable investment environment and weak business sentiment. Despite the overheated housing market, construction investment fell as the government reduced infrastructure investment.
Low domestic demand overall contributed to reducing job growth and dragging down the economic growth rate to the 2 percent range.
The Bank of Korea predicted in April last year that the local economy would grow 3 percent in 2018. But it downgraded the projection to 2.9 percent in July and again revised it down to 2.7 percent three months later. It turned out that the Korean economy met the central bank’s October forecast of 2.7 percent for 2018.
Exports rose 4 percent, the highest in five years. Despite the upswing in exports, construction and corporate investment decreased more sharply than expected. Construction investment fell 4 percent last year from the previous year, the steepest on-year decrease since the 1998 Asian financial crisis, and facility investment also declined 1.7 percent in 2018.
Job numbers could be described as “shocking.” The number of jobs increased in 2018 slid below 100-thousand for the first time since 2009 global financial crisis, while jobless numbers have hovered above 1 million for three consecutive years.
In a positive sign, though, Korea’s per-capita income is estimated to surpass 30-thousand US dollars last year.
Korea’s per-capita income moved upward in 2018, thanks to a rise in nominal gross national income and the stable won-dollar exchange rate. It shows that the Korean economy has grown every year anyway, although the growth rate has fallen.
Koreans finally achieved per capita income of 30-thousand dollars last year, 12 years after passing the 20-thousand dollar threshold. The government should employ effective economic measures to continue to maintain the level and even raise it to 40-thousand to 50-thousand dollars.
30-thousand dollars of individual average income is one of the indicators referenced by many for gauging a country’s wealth. In 2017, 28 countries were identified with 30-thousand dollar income. Only six countries in the world, including the U.S., the U.K. and Japan, belong to the group of economic powerhouses with a population of over 50 million and per capita income surpassing 30-thousand dollars. If the Bank of Korea’s estimation proves to be correct, Korea will become the seventh country to join the rich club. However, the remarkable feat is hardly being felt among the Korean public because household income growth is relatively slow.
Let’s turn our eyes to exports, Korea’s main driver of growth. The outlook for exports this year is not bright, which is not good news for the export-driven Korean economy.
Korean exports are expected to experience difficulties this year, considering the unfavorable global trade environment. Amid the trade war between the U.S. and China, many countries will lean toward trade protectionism in order to boost their own economies. Against this backdrop, Korea may see a decline in its outbound shipments this year, especially in semiconductor exports, as memory chip prices have been falling lately.
Some analysts forecast that Korea’s economic growth rate for 2019 will be even lower than last year’s, citing a possible slowdown in exports. Many experts also predict that construction and facility investment will continue to remain in the doldrums this year.
Korea posted a trade deficit this month. According to the Korea Customs Service, Korea’s exports and imports between January 1 and 20 reached 25.7 billion US dollars and 27.3 billion dollars, respectively.
In a worrying sign for Korea, exports are declining. Korea’s exports decreased 14.6 percent on-year in the first 20 days of January, with shipments of semiconductors, a major export item, plummeting 28.8 percent. Korea’s exports to China, which accounts for a quarter of its total exports, dropped 22.5 percent in the cited period.
Considering that the Chinese economic growth last year slowed to 6.6 percent, the worst performance in 28 years, Korea’s exports to China are feared to slow down in 2019. Sluggish exports, coupled with weak domestic demand, may bring down Korea’s economic growth rate.
On January 24, the Bank of Korea adjusted Korea’s economic growth for this year to 2.6 percent, down 0.1 percentage point from its earlier figure projected last October. Professor Kim explains how to prevent the situation from worsening further.
Most importantly, it is necessary to create more jobs. Young jobseekers aged between 15 and 29 are experiencing the worst employment conditions. It is crucial to solve the youth unemployment problem. Last year, the government pushed to create jobs by pressuring government agencies and public companies.
Basically, however, it is companies that create jobs. Therefore, an increase in corporate investment is essential to generate jobs. It is necessary to improve the environment for corporate investment and encourage private companies to expand their investment so that many more jobs can be created. This is one of the most important tasks this year.
On January 15, President Moon Jae-in convened a meeting with representatives of large and mid-sized firms and asked them to make more investment. He also stressed that the government would form an investment support team aimed at promoting corporate investment. But Professor Kim says that stronger industrial competitiveness is the key to a favorable investment environment.
One of the factors behind the dismal job market is that major Korean industries have lost out to their Chinese counterparts. The shipbuilding and automobile industries in Korea have cut employment through restructuring, leading to fewer jobs and low growth.
It is necessary to create new, promising industries and generate jobs there. President Moon has recently said that it is very important for the manufacturing industry to sharpen its competitiveness and the government should devise proper industrial policies.
The key is how to boost Korea’s industrial competitiveness, which has become weak in recent years, compared to China. It may take time to draw up a specific roadmap for reinforcing corporate competitiveness. But once the roadmap is complete, Korean companies will be eager to make an investment in the belief that the economy will improve. More jobs will then be created.
In the fourth quarter of last year, the Korean economy grew 1 percent from the previous quarter, due to heavy government spending. But the annual growth rate ended up falling to 2.7 percent, reflecting that the effects of fiscal spending and exports are limited.
Economic growth is driven by domestic demand, exports, investment and government spending. In order to record positive growth in all these areas, Korea should secure industrial competitiveness first.