[The Editors' Verdict]If Low Growth Is Hard to Heal, Identify the Risk Factors

The October 2020 World Economic Outlook released by the International Monetary Fund (IMF) shows a significant difference compared to the June forecast. Except for some emerging developing countries such as India and ASEAN (Association of Southeast Asian Nations), growth forecasts for this year have mostly been revised upward for advanced economies (-4.9% → -4.4%), but the outlook for next year has been lowered (5.4% → 5.2%). However, global trade volume was revised upward to -10.4% in 2020 and 8.3% in 2021, compared to the June forecast (-11.9% and 8.0%, respectively). If this prediction holds true, the global economy will grow by just about 0.5% compared to 2019 next year. Although the economy may seem better than expected for now, it ultimately means there is little to look forward to.

There are two reasons why the IMF denied a 'V-shaped' recovery of the global economy. First, the IMF assumed that social distancing measures due to the COVID-19 pandemic would continue until 2021, and that the pandemic would only be overcome around the end of 2022.

More importantly, the IMF reflected medium-term adjustment costs to heal the scars left by the pandemic. This includes factors that hinder economic productivity such as shocks from corporate bankruptcies, reallocation of employment and resources between companies and industries, delays in restructuring zombie companies, and the recovery and reorganization of global value chains (GVCs).

The IMF forecasted that South Korea’s economy will contract by -1.9% this year (June forecast -2.1%) and grow by 2.9% in 2021 (3.0%). This forecast also differs from the trend of rebounds after past crises. For example, following the global financial crisis, South Korea’s economy grew by 0.8% in 2009 and then surged to 6.8% in 2010. Compared to the rapid growth in global trade volume from -10.7% in 2009 to 12.8% in 2010, the degree of rebound this time is inevitably weaker.

Considering that the pandemic’s damage has been concentrated in the service sector, why has export manufacturing not properly driven growth? The clue to this question can be found in the export flows of South Korea and China. In 2019, when the US-China trade war occurred, China’s exports decreased by only 0.8% compared to 2018, but South Korea, a third country, saw a sharp 10.2% decline. Such erosion of export market share aligns with the observation that South Korea’s export industries are losing competitiveness.

For countries highly dependent on exports, a decline in export competitiveness is tantamount to stagnation in productivity. Ultimately, the modest growth forecast for next year reflects that the South Korean economy has entered a low-growth trend due to productivity stagnation. Considering the “5-year 1 percentage point decline rule” (which states that South Korea’s long-term growth rate has regularly declined by 1 percentage point every five years since the early 1990s ? see the October 13 issue of SisiBibi), the 2.9% forecast cannot be viewed solely as a disappointing prediction.

If the low-growth trend cannot be healed in the short term, it is appropriate to identify and manage the risk factors in our economy. Under low interest rates, risk-seeking behavior chasing high returns inevitably occurs. The private equity fund (PEF) incidents following derivative financial product scandals are representative examples. Major financial accidents occur when asset market booms accumulate and intensify energy. The 2011 savings bank crisis happened because savings banks that invested in real estate project financing (PF) without much regulation lacked funds to return to customers when the real estate boom ended. If regulatory authorities respond to PEF incidents only after the fact, the confusion of the past savings bank crisis could be repeated. Currently, the exact scale of PEFs, where and how much they have invested, and their structures are not clearly known. However, bad news is better than no news because knowing allows for countermeasures.