Concerns are mounting that South Korea's economic growth rate may be stuck in the 1% range this year and the won-dollar exchange rate could settle in the 1,500 won range, as the prolonged Middle East conflict deepens the recession.
A survey conducted by the Seoul Economic Daily on the 5th of 20 domestic economics and business professors and bond market experts found that the average growth forecast for Korea this year came in at 1.92%, down 0.09 percentage points from 2.01% in February. The diagnosis is that even the government's 2.0% growth target may be difficult to achieve, as multiple crises overlap — including an oil price shock stemming from the Middle East, a high exchange rate, and rising market interest rates. For the won-dollar exchange rate, 59% of respondents projected 1,460 won or higher, and 12% forecast 1,520 won or above.
The greater concern is that the specter of stagflation — rising prices amid economic recession — is growing darker. According to the International Finance Center, eight global investment banks have sharply revised up their forecast for Korea's consumer price inflation this year to 2.4%, a 0.4 percentage point increase from 2.0% in February. That exceeds the government's target of 2.1%. Some analyses suggest consumer price inflation could surge to 3.0% in the second or third quarter.
The government must refrain from putting forward rosy economic outlooks on the grounds of strong exports driven by a semiconductor super-boom. To be sure, it is encouraging that Korea's total exports through February reached $133.1 billion, overtaking Japan's $118.7 billion, with projections that Korea's export volume could surpass Japan's for the full year. There is also welcome news that Samsung Electronics' first-quarter operating profit, to be announced this week, could reach 40 trillion won — more than double the previous quarter. However, a "rain-fed economy" dependent on a single sector like semiconductors cannot guarantee sustained growth.
To navigate the fierce headwinds of the "triple highs" — high exchange rate, high prices, and high interest rates — weighing heavily on the Korean economy, the country must improve its economic fundamentals. Now is the time to boldly pursue the structural reforms that Kim Jeong-gwan, Minister of Trade, Industry and Energy, strongly signaled in a recent interview with the Seoul Economic Daily, saying, "We must prepare for a 'great transformation of the industrial ecosystem,' even if it means mending the barn after the horse has bolted." The government must accelerate restructuring of industries with overcapacity and troubled companies, and activate comprehensive support measures encompassing tax incentives, subsidies, and regulatory innovation for advanced future industries. Diversification of raw material supply chains — the Achilles' heel of the Korean economy — and labor market reform must not be delayed either.