‘Ice age’ in the offing

Economy trapped in prolonged slow growth

The Korean economy has entered a phase of prolonged slow growth where no major shocks exist but a myriad of small risks combine to undermine economic fundamentals at a gradual pace.

Simply put, Asia’s fourth-largest economy is not likely to undergo a major crisis similar to the one in the 1997-98 or the credit card fiasco in the early 2000s but chances are that it will stay in the doldrums for a considerable period.

What is worrying is it is hard to forecast how long this slump will last and how deep it will be. Under these conditions, there is no financial system failure risk but more firms are becoming marginalized, deteriorating banks’ financial soundness and weakening growth potential. The recent fiasco of the Woonjing Group, the nation’s 32nd-largest conglomerate, is an epitome of where the economy stands.

The disastrous vortex of declining growth, spiraling debt and rising unemployment in recent months has been underlining the fragility of the economy. A closer look at the numbers suggests that the current economic turmoil, looking more and more like a full-blown recession, should be taken more seriously than it is now.

“I would say that the economy is probably facing an ice age. And I wouldn’t use the word ice age for something that could be taken care of in a two or three year period,” said a senior economic policymaker who wanted to remain anonymous.

“There should be no debate on the household debt problem and this is why we are seeing the housing market appear like a patient in an intensive care unit. It’s plain that we should be better prepared for an extended recession and lengthy period of slow growth. The decline in the economically active population is a critical concern and so is employment as we need to find ways to boost incomes more broadly.” According to government data, the country averaged annual economic growth of 5 percent between 1998 and 2002, a period when the pain from the foreign currency crisis was still fresh. The country also managed 4.3 percent growth from 2003 and 2007 after the credit card crisis.

Korea’s pace of growth since the 2008 collapse of Lehman Brothers, however, has been just a hair over 3 percent. Navigating the current difficulties would require a meaningful rebound in economic activity through improvements in employment and household income. But there is no reason to think that an improvement in these areas is coming soon.

Korea bounced back quickly from the late-1990s crisis as the essence of the problem had less to do with the country’s industrial makeup than that its borrowing in foreign currency. It also survived the credit card scare of 2003 by converting the plastic bubble into a real estate one.

The current turmoil appears to be an entirely different animal than the ones that tormented the country over the past 15 years. The foreign currency crisis and the credit card blow-up were extraordinary events that floored the country instantly.

The picture now is more like a slowmotion drive down a cliff or death by a thousand cuts. Equally in play are the bad external conditions, which continue to pull back the pace of growth and fundamental problems from a workforce aging in dog years.

Recovering from the current mess will likely require a much longer and laborious effort. It could be said that Korea’s exit from the past two crises in essence was the transfer of corporate liabilities into consumer debt.

Household debt is now at around one quadrillion won to match an entire year’s gross domestic product. Add in the bad employment figures and it becomes obvious that consumers won’t be able to pick up the slack when exports continue to slide under worsening global conditions.

Numbers show that Korea is moving toward an aged society at the fastest pace in the world, triggering concerns that its top-heavy population structure will become a growth buster. <The Korea Times/Kim Tong-hyung>

news@theasian.asia