New strategy needed to tackle downside risks
Key economic indicators show the Korean economy is losing steam and may face stagflation, a combination of an economic stagnation and higher inflation. The country's industrial output, consumption and investment all shrank for the first time in over two years in April, according to Statistics Korea.
Industrial production dropped 0.7 percent lin April from March when it rebounded by 1.6 percent after suffering a 0.3 percent fall in both January and February. The manufacturing industry led the contraction by displaying a 3.1 percent dive in output. Semiconductor production slid 3.5 percent, while food and beverage output tumbled 5.4 percent.
Retail sales, a gauge of private spending, edged down 0.2 percent in April from the previous month, marking a two-month downward streak. They fell 0.7 percent in March. Consumer sentiment has yet to improve although health authorities lifted almost all COVID-19 restrictions.
More worrisome, facility investment nosedived 7.5 percent, continuing a losing streak for three consecutive months. This was attributed to a delay in investments by chipmakers and other manufacturers amid global supply chain bottlenecks and soaring prices of energy and raw materials.
The data demonstrate that the economy is losing momentum after rebounding by 4 percent in 2021 from a 0.9 percent contraction in 2020 due to the pandemic. In fact, the country is confronting mounting downside risks such as higher oil and food prices on the heels of the prolonged Russian war in Ukraine as well as global supply chain disruptions.
The outlook is getting bleaker as the export-driven Korean economy faces an escalating U.S.-China rivalry. Geopolitical risks are likely to weigh on the economy as President Yoon Suk-yeol agreed to strengthen Korea's alliance and partnership with America during his May 21 summit with vising U.S. President Joe Biden. Korea's participation in the U.S.-led international coalition against China could reduce its exports to the world's second-largest economy and the nation's biggest trading partner.
Another downside risk is the U.S.' big step to raise its key interest rate to tame soaring inflation. The Bank of Korea (BOK) raised its policy rate by 0.25 percentage points to 1.75 percent last week as part of efforts to bring runaway inflation in check. It was the fifth rate hike since last August. Consumer prices surged 4.8 percent in April, hitting the highest level seen in more than 13 years, raising concerns that inflation could rise above 5 percent in June.
Against this backdrop, the BOK revised down its 2022 economic growth outlook to 2.7 percent from 3 percent. On Thursday, Moody's Investors Service also lowered the outlook to 2.5 percent from its previous figure of 2.7 percent.
Now the problem is how to fight inflation effectively while boosting the momentum for economic growth. This is a daunting task for the new Yoon Suk-yeol administration. Yoon and his economic policymakers should work out a new strategy to ensure price stability and sustainable economic growth. As he promised, Yoon must promote deregulation, innovation and entrepreneurship to revive the economy.
Key economic indicators show the Korean economy is losing steam and may face stagflation, a combination of an economic stagnation and higher inflation. The country's industrial output, consumption and investment all shrank for the first time in over two years in April, according to Statistics Korea.
Industrial production dropped 0.7 percent lin April from March when it rebounded by 1.6 percent after suffering a 0.3 percent fall in both January and February. The manufacturing industry led the contraction by displaying a 3.1 percent dive in output. Semiconductor production slid 3.5 percent, while food and beverage output tumbled 5.4 percent.
Retail sales, a gauge of private spending, edged down 0.2 percent in April from the previous month, marking a two-month downward streak. They fell 0.7 percent in March. Consumer sentiment has yet to improve although health authorities lifted almost all COVID-19 restrictions.
More worrisome, facility investment nosedived 7.5 percent, continuing a losing streak for three consecutive months. This was attributed to a delay in investments by chipmakers and other manufacturers amid global supply chain bottlenecks and soaring prices of energy and raw materials.
The data demonstrate that the economy is losing momentum after rebounding by 4 percent in 2021 from a 0.9 percent contraction in 2020 due to the pandemic. In fact, the country is confronting mounting downside risks such as higher oil and food prices on the heels of the prolonged Russian war in Ukraine as well as global supply chain disruptions.
The outlook is getting bleaker as the export-driven Korean economy faces an escalating U.S.-China rivalry. Geopolitical risks are likely to weigh on the economy as President Yoon Suk-yeol agreed to strengthen Korea's alliance and partnership with America during his May 21 summit with vising U.S. President Joe Biden. Korea's participation in the U.S.-led international coalition against China could reduce its exports to the world's second-largest economy and the nation's biggest trading partner.
Another downside risk is the U.S.' big step to raise its key interest rate to tame soaring inflation. The Bank of Korea (BOK) raised its policy rate by 0.25 percentage points to 1.75 percent last week as part of efforts to bring runaway inflation in check. It was the fifth rate hike since last August. Consumer prices surged 4.8 percent in April, hitting the highest level seen in more than 13 years, raising concerns that inflation could rise above 5 percent in June.
Against this backdrop, the BOK revised down its 2022 economic growth outlook to 2.7 percent from 3 percent. On Thursday, Moody's Investors Service also lowered the outlook to 2.5 percent from its previous figure of 2.7 percent.
Now the problem is how to fight inflation effectively while boosting the momentum for economic growth. This is a daunting task for the new Yoon Suk-yeol administration. Yoon and his economic policymakers should work out a new strategy to ensure price stability and sustainable economic growth. As he promised, Yoon must promote deregulation, innovation and entrepreneurship to revive the economy.
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