The Korea Herald


Slowdown to bite harder next year: experts

Government should restructure ‘zombie’ firms and set spending priorities straight, analysts say 

By Choi Si-young

Published : June 30, 2022 - 17:31

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The US slowdown is set to cause economic headwinds for South Korea over the next year, though analysts said it would have less impact than the 2007-2008 financial crisis.

Fei Xue, an Asia analyst at the Economist Intelligence Unit, told The Korea Herald that the US and EU represent “two major export markets” for Korea and the deceleration expected to take place there soon would lead to waning demand for chips, cars and other export items.

For now, such exports alongside stronger domestic demand following eased COVID rules will prop up growth, according to the EIU. The research arm of the Economist Group expects the Korean economy to expand 2.7 percent this year. But it slashed the forecast for next year to 2.3 percent.

“Monetary policy tightening puts a lid on private consumption growth and makes financing for business investment more costly. … This will be compounded by waning external demand in that year,” Xue said, referring to Korea’s rate raises ahead as the global economy tips into recession a year from now.

But the harm caused by the global recession would not be worse than what the financial crisis in 2007-2008 had unleashed, according to Dave Chia, an associate economist at Moody’s Analytics.

“If a US recession materialized in the next 12 months, the impact would be significantly smaller than that of the 2008 financial crisis. The effects on the South Korean economy would also be less substantial,” Chia told The Korea Herald.

The global financial system is in better health than it was ahead of the “Great Recession” more than a decade ago, Chia noted, describing US household debt levels and labor market conditions as brighter than what they had been before the global economy took a hit then.

Chia added that the Wall Street research firm is also lowering Korea’s growth forecast to 2.8 percent because of persistent inflation, saying growth for next year will slow to 2.4 percent.

Rate hikes, which ease inflation but are less effective when used to offset supply-side price pressures seen in today’s surging oil and food costs, should be gradual to avoid worsening household finances, according to Chia.

The assessment came as fears over a slowing global economy are gripping markets. Wall Street’s biggest banks are ramping up forecasts for a US recession over the next year amid hawkish rate hikes, while Korea’s finance minister is openly calling on the country’s economic chiefs to brace for a “full-blown crisis.”

“The US and EU are seeing their highest price surge in 30-40 years. … That affects us,” Finance Minister Choo Kyung-ho said Sunday. The Finance Ministry has revised up its inflation forecast for this year to an 11-year high of 4.7 percent while lowering this year’s growth forecast to 2.6 percent.

Fighting runaway inflation with monetary policy alone is reaching its limits. Last week, the Bank of Korea said debt owed by Korean households and companies in the first quarter of this year reached a combined 3,468.4 trillion won ($2.6 trillion), or 219.4 percent of Korea’s gross domestic product.

Long-term battles ahead

Kim Young-ick, an economics professor at Sogang University’s Graduate School of Economics, said central banks stay away from dramatic rate increases to avoid a downturn, suggesting lifting borrowing costs are no panacea.

“In the long run, we need to restructure businesses -- those facing bankruptcy or which will be close to it if the government cuts fiscal support,” Kim said, adding that Korea’s growth next year would dip below 2 percent, which is by far the most pessimistic outlook by analysts.

Kim stressed that the Yoon Suk-yeol government would have to press ahead with liquidating “zombie” firms that cannot repay debt on their own unless the government rolls over their maturing loans.

“Thirty-five percent of Korean companies are unable to cover the interest on their loans with operating profits they earn annually. If they can do that on their own, they surely can do more,” Kim said.

Restructuring or setting the priorities straight should also take place in how the government spends money as it looks to work with a smaller budget from having reduced the corporate income tax as part of its new economic plan, said Sung Tae-yoon, an economics professor at Yonsei University.

The five-year plan -- released two weeks ago to essentially support deregulation including reducing the maximum corporate tax rate to jump-start the economy -- puts companies first and the state second as a “go-to” fixer handling their complaints.

“The plan looks sound enough to me, but what it’s missing are steps showing how the government will cut back on things it had covered with extra cash from COVID relief packages and corporate income taxes, which will no longer be there anymore,” Sung said.

Financial health is just as important for the government as it is for businesses, especially if they want to come out relatively unscathed from the crisis, Sung noted.