[Insight & Opinion] Is the Era of Prosperity Coming to an End?

Last year, nominal Gross Domestic Product (GDP) fell by 8% to $1.6652 trillion, marking the largest decline since the global financial crisis in 2009 (-9.9%). Since the early 1960s, when South Korea's per capita GDP was $100, the country has sustained rapid growth exceeding $30,000 over 60 years, enduring three major crises: the oil shock in the 1970s, the foreign exchange crisis in the late 1990s, and the global financial crisis in 2007.

Nonetheless, unlike many other countries that have faced difficulties, South Korea was able to overcome these challenges thanks to the will of its people, government policy efforts, sacrifices by companies and citizens through restructuring, and the effectiveness of export-driven policies amid globalization.

In particular, China’s influence over the past 30 years has been significant. China has served as a production base by providing relatively skilled labor at low wages necessary for the growth of major advanced countries, while also becoming a huge market with its own rapid growth and population of 1.3 billion. Perhaps South Korea has been one of the greatest beneficiaries of this. The international political and economic environment remained relatively stable, allowing for balanced prosperity.

However, in recent years, this balance and strategy of shared prosperity have begun to crack, leading to major changes. The era is shifting from shared prosperity to one where each must seek their own survival.

The most notable change is in the labor market. China’s labor force has contributed to global price stability, but significant changes are underway. Wages in major Chinese cities have risen to unimaginable levels, causing even the software sector to move from first-tier to second-tier cities or to other countries. Moreover, many countries are actively pursuing reshoring policies to protect their domestic workforce, and the United States is pressuring key industries to produce domestically.

On top of this, wars over core technologies, materials, parts, and equipment, as well as supply chain conflicts, along with the Ukraine war and the Israel-Hamas conflict, have made future predictions difficult. China is naturally concerned about deflation due to declining exports and slowing growth, and as the economy worsens, the real estate market slows, causing a chain reaction impacting developers, construction companies, and financial institutions.

In the U.S., abundant liquidity released during the COVID-19 period has pressured prices, prompting multiple significant interest rate hikes to counter inflation, which in turn is causing turmoil in the real estate market. It remains to be seen when these interactions will stabilize interest rates and restore balance.

Considering the risks, South Korea’s interest rates should ideally be higher, but financial authorities are hesitantly following suit. Despite this, prices continue to soar while the real estate market tightens, putting developers, savings banks and securities firms involved in project financing (PF), and construction companies providing guarantees in crisis. Ordinary citizens who have stretched their finances to buy homes (‘Yeongkkeul’) inevitably suffer. Those who purchased homes with loans face increased interest burdens, while asset holders see their financial assets grow. Ultimately, as companies exit the market, prices rise, and the lives of ordinary people become harder, the economy is bound to regress. We are witnessing an increase in businesses closing due to soaring food prices and poor sales. There is growing concern that the era of prosperity is ending and that deflation requiring austerity is approaching.

Kim Hong-jin, CEO of Work Innovation Lab