[Viewpoint] Korean Economy Faces a Critical Year Ahead

A friend recently closed down a music academy that had been operating for a long time. At one point, the academy had 40 to 50 students, but recently the number dropped to around 10. Most of the students were from nearby elementary schools, and as the number of students decreased, naturally fewer people visited the music academy. After deducting rent for the commercial space, electricity bills, and maintenance costs for the academy vehicle, the remaining money was only a few hundred thousand won. Upon deciding to close the business, he disposed of eight pianos free of charge. Although the pianos were worn out, there was no one willing to buy them even at a low price. He tried to apply for government closure support funds but was told that this year’s budget for support funds had already been exhausted. He said, "I heard it was difficult, but it seems like there are really many stores closing."

The domestic market is struggling. It has not recovered from sluggishness throughout this year. In particular, the livelihoods of ordinary people such as self-employed workers and construction workers have worsened significantly. The closure rate of dining establishments in the second quarter of this year was 4.2%, close to the 4.4% in the first quarter of 2020 during the COVID-19 pandemic. Corporate bankruptcy rulings processed up to last month this year totaled 1,380 cases, a 27.7% increase compared to the same period last year.

The government said that the warmth from revived exports in the second half of last year would spread to the domestic market in the second half of this year. However, this prediction was off the mark. Although there have been no events shaking the entire economy like the 1997 foreign exchange crisis, the 2008 global financial crisis, or the 2020 COVID-19 pandemic, the Korean economy seems to be gradually exhausting its stamina.

Both the Korea Development Institute (KDI) and the International Monetary Fund (IMF) have lowered their growth forecasts for the Korean economy this year from 2.5% to 2.2%. The forecast for next year is 2.0%, down 0.2 percentage points from the original 2.2%. This is close to the potential growth rate. The potential growth rate refers to the maximum growth rate a country’s economy can achieve by utilizing all production factors such as capital, labor, and resources. Achieving the potential growth rate is not an easy task.

Even exports, which have driven growth this year, are unlikely to be promising next year. With the election of Donald Trump as U.S. president, the trade environment is expected to worsen significantly. President-elect Trump has announced that he will sharply raise tariffs on major exporting countries as soon as he takes office. Major Korean companies, preparing their management strategies for next year, have declared emergency management or launched large-scale workforce reductions, judging that the domestic and international business environment is rapidly deteriorating. The ground on which Korean companies can stand has become narrower in the face of U.S. protectionism and China’s fierce challenge.

The tariff and immigration policies of the second Trump administration are likely to trigger global inflation. Rising import prices due to a strong dollar and price increases in grains and food caused by abnormal weather could destabilize prices that had shown signs of stabilization.

Korea faces even greater crisis due to low birth rates and aging population. Changes in population structure reduce the vitality of Korean society and economy. Welfare costs are increasing, but tax revenues are decreasing due to a decline in the youth population. Structural reforms such as pension reform and labor reform are stagnant.

This is called a "complex crisis." The government finds it difficult to present clear-cut policies in the face of an increasingly complicated and multidimensional economic situation. If the Bank of Korea lowers interest rates, it could lead to overheating in the real estate market and an increase in household debt; if the government excessively expands fiscal spending, national debt will accumulate, causing various side effects.

However, the weakening economic stamina cannot be left unattended. Even if interest rates are lowered, subtle policy skills must be developed to manage household debt so that it does not increase. When executing next year’s budget, if additional fiscal input is deemed necessary, the government should not hesitate to prepare a supplementary budget. The supplementary budget is like a steroid injection: chronic use is harmful, but when prescribed appropriately, it is an effective medicine. Although such measures may not be immediately necessary, a time may come when decisive treatment for the Korean economy is required. It is hoped that the government will steel its resolve before establishing next year’s economic policy direction.