hankyoreh

Banners for savings accounts hang in the window of a bank in Seoul. (Yonhap)

“We have more work to do.”

These were the words of US Federal Reserve Chair Jerome Powell following a decision last Thursday to further raise the policy interest rate.

The move dashed market hopes that recession fears would lead the Fed to lower the rate. The Financial Times wrote, “The Fed sent a clear signal of more such pain to come on Wednesday with a new set of economic projections that showed the benchmark rate hitting a higher level than previously projected and sitting at that threshold for an extended period.”

This read as a warning that the Fed could raise the rate further until inflation is reined in, even in dampened economic conditions.

South Korea’s situation is very similar to the one in the US. This year, the benchmark interest rate rose from 1.25% in January to 3.25% as of November — a rise that is expected to put pressure on all areas of the real economy next year, including consumption, investment and hiring.

“It typically takes six months to a year for the effects of raising the benchmark interest rate to manifest across the real economy,” said Lee Seung-han, head of the Ministry of Economy and Finance (MOEF) economic analysis bureau.

The biggest test appears likely to come in the first half of 2023. Many are predicting harsh weather amid the combined effects of high prices and high interest rates.

Domestic consumption is already showing signs of a chill. In South Korea, high income brackets have been the first to close their wallets. Major department store Shinsegae’s sales for November were down by 1.3% from the same month in 2021 and 10.5% from October 2022.

“Willingness to consume has been drying up fast with the higher interest rates and steep drop-off in housing transactions,” said a department store industry source.

According to MOEF figures, last month’s sales for South Korea’s big three department stores — Lotte, Hyundai and Shinsegae — were up by just 1.1% from a year earlier. The rate of increase was down all the way from 7% a month before.

Another steep decline was observed for automobiles, where domestic sales in October were down by 7.8% from the previous month.

Slowing consumption in South Korea and such major economies as the US and the countries of Europe also has the potential to deal a serious blow to production and exports for South Korea’s mainstay manufacturing industries.

Last month’s retail sales in the US — the world’s biggest consumer market — showed their biggest decline in 11 months, falling by 0.6% from October levels despite major shopping occasions like Black Friday.

As consumption stagnates in those major markets, the inventory to sales ratio (I/S ratio), or the manufacturing industry inventory index divided by the factory shipping index, was above 120% for a fifth straight month since June for semiconductors and other domestic manufacturing industries. This was the highest level since May 2020, when it stood at 127.5%.

The Bank of Korea predicted that exports of South Korean products would experience negative growth in the first half of next year with a 3.7% decline compared with the first half of 2022.

Fears that restaurants and other domestic service industries would be hit hard are becoming a reality. In the third quarter of 2022 (July to September), South Korea’s hospitality and restaurant production was up by 7.7% from the previous quarter. By October, that trend had already reversed as the economic slump hit consumers in their pocketbooks.

In a report published last year, Korea’s central bank estimated, “When the average loan-to-value ratio for households is around 75%, a 20% decline in housing prices translates into a consumption decline of as much as 4% over the same period.” This means that high levels of household debt — such as those in South Korea — mean a bigger blow to the real economy in areas such as consumption and hiring.

The situation has led major institutions to issue progressively lower projections for South Korea’s 2023 growth rate. In October, the International Monetary Fund projected a 2% growth rate for South Korea in 2023. Last month, the Organisation for Economic Co-operation and Development (OECD) gave an estimate of 1.8%; in mid-December, the Asian Development Bank put the number at 1.5%.

Apart from the COVID-19 pandemic’s most severe year in 2020, when it reached -0.7%, this is the first time the predicted growth rate has been below 2% since the financial crisis year of 2009, when it was 0.8%.

The South Korean government acknowledged that next year’s economy would be “in a more difficult situation than this year,” but stressed that it would “not be a crisis like in the past.”

Its argument is that with South Korea’s potential growth rate — reflecting the rate that could be achieved through sufficient use of labor and capital — currently down to just over 2%, a projected growth rate in the 1%—2% range does not represent a shock to the real economy on par with the Asian financial crisis of the late ’90s or the global financial crisis of the late ’00s.

This attitude may also explain why the administration shows no visible signs of policy support measures for ordinary South Koreans, in comparison with the intensive real estate measures such as the loosening of regulations on homeowners who possess multiple properties.

“South Korea’s ability to respond to economic conditions through taxation and fiscal means is weaker than in other OECD members,” explained Kang Byung-goo, a professor of economics at Inha University.

“Rather than simply relying on existing systems, the administration should be beefing up the redistribution role of taxation and use the resources to build a solid safety net for society and labor,” he stressed.

By Park Jong-o, staff reporter

Please direct questions or comments to [english@hani.co.kr]