Weak Economic Growth in South Korea

Many know South Korea as one of the strongest economies in East Asia. They think of the wide array of Korean products in the electronics and auto markets as proof of this concept. In truth, the South Korean economy is crawling forward, raising concerns for both government officials and investors.

Many know South Korea as one of the strongest economies in East Asia. They think of the wide array of Korean products in the electronics and auto markets as proof of this concept. In truth, the South Korean economy is crawling forward, raising concerns for both government officials and investors.

South Korea’s last administration, under the leadership of President Lee Myung-bak, had promised economic growth of 7%, a level the nation once achieved regularly. Unfortunately, Myung-bak’s government failed to deliver on those promises. That led to the rise of South Korea’s new president, Park Geun-hye, who promised a much more modest goal of just 4% growth.

However, in a report issued by the Bank of Korea in January, economic growth forecasted to be just 3.4%, while international banking institution, HSBC, has issued its own report capping projected growth at barely 3%. Reasons for this sluggish economy are varied. Some is a result of the spillover of America’s economic slowdown, still rippling across global economies. Some has flowed from the drop in the price of oil.

Much of it is a result of weak consumer spending in South Korea. Consumer behavior is not surprising, however, given that wages have grown by less than 1% per year on average in the last decade (after adjusting for inflation), while borrowing has grown to match 80% of GDP.

Industrial output is also slowing, as China (South Korea’s largest export market) has seen the onset of its own faltering growth. Deepening this concern is the strength of the won, which has surged by 40% against the yen since 2012. Given that South Korea competes chiefly with Japan in economics and car manufacturing, among other sectors, this has harmed South Korea’s export profits.

In an effort to stimulate growth, the South Korean central bank cut its interest rate to just 1.75% (the lowest in the nation’s history), and some analysts believe it may cut it once more later this year. As a result, prices for most products in South Korea are actually falling; a trend that the government hopes will stimulate consumer spending.

Still, some believe these rate cuts and other efforts to prop up the economy will have little effect. These detractors feel the measures will only slightly lower borrowing expenses, not stimulate consumerism. They feel that an increase in government spending is the only way to stimulate significant economic growth.

To that end, the government announced plans to invest 10 trillion won in various stimulus programs later this year; a move designed to prod companies to create more jobs and raise wages.