Warning against recession
Time to take pre-emptive action to avoid woes
The Korean economy faces greater downside risks than ever before with most indicators showing it is losing steam rapidly with no sign of recovery in sight. No one can rule out the possibility of the country plunging into a recession if the Moon Jae-in administration fails to take radical measures.
In fact, the alarm has already been rung. The economy has undergone a prolonged slump because Moon's "income-led growth" policy has made little progress. His inclusive growth strategy has failed to create a virtuous cycle of stimulating consumption, production and investment for stable economic growth.
Against this backdrop, Bank of Korea (BOK) Governor Lee Ju-yeol warned against a potential recession last Friday. Lee said such fears are growing tangibly -- a change of stance from his earlier views that a recession was a remote possibility.
His remarks have drawn attention. They came after the central bank decided to leave its key interest rate unchanged at 1.5 percent. The decision followed a rate cut of 0.25 percentage points in July, the first of its kind since June 2016. So what Lee said was interpreted as hinting at a further rate cut ― possibly in October at the earliest.
Lee cited four major external factors as mounting downside risks. They are the continuing U.S.-China trade war, uncertainties arising from Brexit, populist policies in some eurozone countries and a looming financial crisis in emerging economies. These adverse elements are likely to take a toll on Korea's export-oriented economy.
Domestically the economy has extended its slowdown due to sluggish production and investment. This made the central bank revise down its 2019 economic growth projection to 2.2 percent from its earlier figure of 2.5 percent. It may slash the projection further amid the deteriorating economic conditions.
More worrisome is the escalating trade dispute between Seoul and Tokyo. Korea is feared to suffer a severe setback from Japan's export restrictions on strategic industrial materials and parts which are essential for Korean firms to produce high-tech goods. The nationalist Shinzo Abe government removed Korea from its "whitelist" of favored trading partners last month after putting export curbs on three key materials needed to manufacture semiconductors and display panels in July.
Exports -- Korea's growth engine -- plunged 13.6 percent last month from a year earlier, extending their decline for nine consecutive months. Shipments of semiconductors tumbled 30.7 percent amid a global downturn. The country's exports to China and the U.S. nosedived 21.4 percent and 6.7 percent, respectively, largely due to the tariff war between the G2 economies.
Now it is time to take pre-emptive measures to avoid any possible economic woes. The BOK's monetary easing and the government's expansionary fiscal policy are necessary, but not sufficient to reverse the slump. The Moon administration should mobilize all possible means available to prevent a looming recession. Most of all it must push for structural economic reform, deregulation and innovation.
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