A once fearsome economy struggles to fend off a deflationary funkMadeinkoreablog
THE previous president of South Korea, Lee Myung-bak, set a target for economic growth of 7%—a level the country once achieved regularly, but missed on his watch. Last year his successor, Park Geun-hye, adopted a more modest goal of 4%. Yet in January the Bank of Korea revised its growth forecast for this year down from 3.9% to 3.4%. HSBC, a bank, thinks growth will barely top 3%.
Consumer spending is feeble. Wages have grown by less than 1% a year over the past decade, on average, after adjusting for inflation. Households have been borrowing instead: their debts, of 80% of GDP last year, were higher than Americans’, according to McKinsey, a consultancy.
Industrial output is also sagging. Slowing growth in China, South Korea’s biggest export market, has taken its toll. So has the strong won. It has surged by 40% against the yen since late 2012, which has pinched exporters’ profits, since they compete against Japanese firms in electronics and carmaking, among other businesses.
In response, the central bank cut its main interest rate twice last year. This month it clipped it by a further quarter of a percentage point, to 1.75%—an all-time low. It may well cut again soon. In February inflation dropped to its slowest pace since 1999, 0.5% year on year. That is well below the central bank’s target of 2.5-3.5%. Excluding tobacco, which has become more expensive recently, prices are actually falling.
The government expects the rate cut to pep up consumer sentiment and ease the squeeze on exporters. Several other Asian countries have had to keep rates higher, to stem an outflow of funds in anticipation of higher interest rates in America. But South Korea is better protected than most, with a big current-account surplus and little external debt.
Still, Jun Sung-in of Hongik University says the latest rate cut will amount to little more than a “spring breeze” for the economy. It will slightly lower debt-servicing costs, but otherwise do little to revive household consumption. It is true that debt may continue to grow. In the last quarter of 2014 it expanded at its fastest pace in a decade, thanks to an easing of restrictions on bank lending intended to revive the faltering property market. But much of the new credit is being used for everyday expenses, or to refinance existing debt, rather than to buy homes.
Raising government spending, some say, would provide more of a boost to the economy than lower interest rates. In mid-March the government announced it would bring forward 3 trillion won ($2.7 billion) of spending planned for later in the year, and attempt to expand corporate investment by another 7 trillion won through loans from state-owned banks and expansion schemes at state-owned firms, among other measures. It is prodding companies to create more jobs, and plans a rise in the minimum wage.
The Bank of Korea says low inflation is mostly due to the plummeting price of oil; the finance ministry contends that the slide in other indicators is transient too. Deflation, they concur, is not on the cards. Yet for four years in a row, South Korea has grown more slowly than the average big economy. Their composure, Mr Jun argues, is a concern in itself.