[Contribution] Korea's growth prospects optimistic, despite inflation, rising debt

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[Contribution] Korea's growth prospects optimistic, despite inflation, rising debt

[Contribution] Korea's growth prospects optimistic, despite inflation, rising debt

Florencia T. Castro-Leal

the latest tech news, global tech news daily, tech news today, startups, usa tech, asia tech, china tech, eu tech, global tech, in-depth electronics reviews, 24h tech news, 24h tech news, top mobile apps, tech news daily, gaming hardware, big tech news, useful technology tips, expert interviews, reporting on the business of technology, venture capital funding, programing language

By Florencia T. Castro-Leal Korea’s handling of the pandemic and policy response have been one of the best in the world. The effective measures have both minimized the loss of lives as well as economic damage. This is due to the mix of adequate health measures, as well as appropriate monetary and fiscal policies, which have enabled the country to weather the health and economic shock during 2020, and foster a strong recovery in 2021.During the pandemic, Korea outperformed most advanced countries in terms of economic output. During 2020 amidst economic uncertainty, GDP fell by less than 1 percent supported by emergency relief funds. Recovery started in the second quarter of 2020 and has continued throughout 2021, so output has already surpassed pre-pandemic levels. The unemployment rate has been below the OECD average; rising to 5.4 percent in January 2021 but coming down to 3.2 percent in November 2021. The main drivers have been a strong manufacturing sector, particularly high-tech products, a strong rebound in exports and the easing of COVID19 restrictions. Although the fiscal position has deteriorated, the government has focused on helping businesses and people mitigate the economic and health consequences of the pandemic.The general government deficit reached 2.3 percent of GDP due to expansionary policies in 2020, and it is estimated to stay at around 3 percent in 2021 and 2022. Higher than usual deficits may continue because of larger expenses, which are likely to remain for a while, and expected flat performance of revenues since they have already recovered to their pre-pandemic levels. On the other hand, monetary policy has been loose since 2008, with historically low policy rates set at 0.5 percent during 2020. As a quick response to recently raising prices, the Bank of Korea has already raised key rates to 1.25 percent in January. Economic forecasts for Korea are positive, with an estimated output growth of 4.2 percent for 2021. From 2022 to 2025, GDP is expected to remain at around 3 percent, near the average observed in the last decade, according to the IMF. Positive forecasts may be attributed to high vaccination rates and a strong recovery of key economic sectors, as well as the return to work of the labor force. Nevertheless, economic uncertainty is still on the horizon due to new COVID-19 variants and medium-term effects related to supply chain issues.

[Contribution] Korea's growth prospects optimistic, despite inflation, rising debt

What are Korea’s short-term challenges? The primary concern is inflationary pressure, which has been receiving attention worldwide due to issues related to the recovery of aggregate demand. This is partly due to people coming back to work and consumption activity returning to normal levels, as well as expansionary fiscal policy pushing prices up. On the supply side, chain disruptions are affecting prices, and although there is no clear estimate of the pass-through to actual inflation, expectations indicate these will return to normal, soon. All in all, inflation spurts in April, October and November 2020 are expected to disappear as monetary policy tightens to regain control on inflation. Second, rising debt is also a concern, as it is expected to reach 51.3 percent of GDP in 2021, 9 percentage points higher than 2019 when it stood at 42.1 percent of GDP, and is forecast to reach 60 percent of GDP by 2024. To this end, Korean authorities recently proposed a fiscal rule to be implemented by 2025 that set an upper threshold on debt target levels at 60 percent of GDP. Meanwhile, fiscal adjustment may come sooner than expected to control growing debt. Third, the reconfiguration of global trade, with countries wanting a more stable supply chain, is already fostering what is being called nearshoring, which, could potentially hurt some Korean industries and investments abroad. The Korean economy might also face structural challenges, which existed before the pandemic. In the decade after 2010, growth slowed down to 2.5 percent a year, compared to the 5 percent average in the 2000s. The trend from 2010 to 2020 could be exacerbated by the COVID-19 shock, as output is being affected by an aging population. The share of people over 65 in 2020 reached 15 percent compared to 10 percent on 2010, and this ratio is expected to rise to 25 percent by 2030; meaning a smaller workforce overall with respect to the retired population. This pattern raises important concerns for the fiscal side of the economy and it has motivated the authorities to anchor fiscal policy to a rules-based framework. Despite these challenges, Korea’s history and recent performance are a keen indicator of its ability to adapt to difficult situations and come back strong. Economic opportunities, especially for its world-leading manufacturing sector, are characterized by innovative and boundary pushing business people, as well as a highly-skilled population; one of the country’s greatest assets.Korea entered the pandemic with strong macro fundamentals and it has shown resilience. Although some macroeconomic indicators have deteriorated, these remain on solid ground supported by a more than capable management. Korea’s resilience has been proven by the response to the COVID-19 crisis by minimizing its impact. Therefore, Korea’s prospects are optimistic. The writer is Chief Economist at Central American Bank for Economic Integration.

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