[Opinion] Bubble Collapse, Polarization, and False Hope

Bubbles Burst Everywhere Due to Shift to Low Growth Trend
Political Circles Court Votes Over Policies Ahead of General Election

Even if the economic growth rate rises from 1.4% last year to the low 2% range this year, it is mainly the result of increased exports and investment, and domestic demand is unlikely to improve. Most forecasts, including those from the Bank of Korea, predict that the private consumption growth rate will remain the same as last year or even decline compared to last year. Meanwhile, China’s economic growth rate is expected to fall from 5.2% last year to the mid-4% range this year, and although the U.S. economy may avoid a recession phase, a decline in growth rate is inevitable. Negative factors such as increased geopolitical risks and climate change shock risks threaten the global economy, making it difficult to expect a significant improvement in exports.

More noteworthy than the growth rate is the fact that the bubble, which can no longer be sustained due to the shift to a low-growth trend in the Korean economy, is bursting in various places. At the end of last year, the composite stock price index was 11% lower than two years ago, and Seoul apartment prices fell 2.2% compared to one year ago and 9.8% compared to two years ago as of December last year. Also, the number of apartment sales in Seoul sharply dropped from 3,899 in August last year to 1,167 in December, and during the same period, the average sale price fell by a staggering 15.5%. Meanwhile, the delinquency amount of eight specialized credit card companies increased by 65% compared to the same period last year. The retail sales index in November was 2.6% lower than the same month in 2021. Consumption contracted due to falling asset values and lower real incomes. As a result, the economic sentiment index announced by the Bank of Korea fell from 104.5 in December 2021 to 91.5 in December 2022, 95.7 in June 2023, and 91.1 in December 2023.

It is also important to note that industrial polarization is progressing markedly along with the bubble collapse. The total service industry index increased by 11.4% from November 2019 to November 2023, but this was mainly driven by a 36.4% increase in the finance and insurance sector during the same period. Meanwhile, general retail decreased by 11%, food and beverage retail by 24%, home appliances and information and communication retail by 33%, and textiles, clothing, footwear, and leather by 17%. Industrial polarization is also progressing in manufacturing. The manufacturing production index increased by 7.4% from November 2019 to November 2023, but excluding semiconductors, it actually decreased by 0.1%, and excluding electronics, telecommunications, and automobiles, it decreased by 1.8%.

Meanwhile, the import share of manufacturing rose from 22% in 2016 to 27% in the third quarter of 2023. In particular, the share for consumer goods increased by 10 percentage points, and intermediate goods by 5.2 percentage points. This indicates that low-tech manufacturing is collapsing, and Chinese imports are mainly taking its place.

The most important question is whether the above patterns in the Korean economy are temporary or the prelude to a long-term recession like Japan’s “Lost 30 Years.” According to the International Monetary Fund (IMF) forecast, the global economic growth rate is expected to be 2.6% from 2023 to 2028, which is 0.92 percentage points lower than the average growth rate of 3.52% from 2019 to 2022. In particular, the growth rate of the Chinese economy, which has served as the growth engine of the global economy over the past 20 years, is expected to fall sharply from an average of 7.34% between 2011 and 2019 to 4.07% between 2023 and 2028, a drop of 3.27 percentage points. Therefore, the long-term outlook is more pessimistic.

Nevertheless, ahead of the general election, each political party has begun to offer hopeful but torturous promises to win the public’s favor. Will the next National Assembly present policy alternatives to stop the bubble collapse and polarization caused by low growth and give hope to the people? Unfortunately, the likelihood seems low. In particular, the current government adheres to the principle of balanced fiscal policy. Ultimately, the people face the task of confronting the era’s trend of bubble collapse and polarization and fiercely contemplating their own ways to survive.

Kim Dong-won, Former Visiting Professor at Korea University