Top economic policymakers were undoubtedly taken by surprise when Statistics Korea said on Tuesday that industrial output, spending and corporate investment declined in June. Prior to the announcement, the policymakers had maintained that the economic conditions were not as bad as they looked.
According to a report from the statistics agency, the June retail and investment in industrial facilities fell 0.5 percent and 6.3 percent, respectively, from May. Adding to the nation’s economic woes was industrial output that was fast running out of steam.
Output in the mining, manufacturing, gas and electricity industries had a 0.4 percent month-on-month decline in June. A year-on-year comparison looked little better. Industrial output expanded 1.6 percent last month from a year ago, sharply down from 2.9 percent in May.
One of the administration’s first reactions to those dismal performances was to acknowledge that the recently revised 2012 growth outlook might not be attainable. Minister of Strategy and Finance Bahk Jae-wan said this year’s growth could fall below the 3 percent mark. Last month, the administration lowered its growth forecast from 3.7 percent to 3.3 percent as the nation’s economy was being buffeted by the fiscal crisis from the eurozone.
Earlier, he had maintained that growth, which slowed in the first half of this year, would pick up in the second half. Moreover, the administration had frontloaded fiscal spending, mistakenly assuming that the second half would be better than the first.
But Bahk was more realistic this time. He said that recovery was being delayed and that it would not be a V-shaped but an L-shaped one when it came near the end of this year as he expected.
The Korean economy, which generates much of its growth by promoting exports, is more vulnerable to a shock from the outside than many others. Its dependence on external trade has expanded, not shrunk, at a time when the global slump is deepening over the European crisis.
The nation’s reliance on external trade, as measured by the ratio of the total exports and imports to gross national income, which stood at 70.6 percent in 2003, soared to 113.2 percent last year. It is now approaching the 120 percent level, exposing the Korean economy to the risk of being pummeled by the external shock of European origin. The IMF has already warned that “rising global uncertainty and weaker external demand are causing headwinds for export-dependent economies such as the Republic of Korea.”
Given the rising level of its reliance on external trade for growth, it should not come as a surprise that Korea feels the pinch more acutely when its exports are on the decline. Last month, Korean exports recorded $44.6 billion, 8.8 percent down from a year ago. Imports also dropped, at a lower rate of 5.5 percent, to $41.9 billion.
The Ministry of Knowledge Economy expects exports to improve this month, but not much. If so, the administration will have to turn to domestic demand as a source of growth if it wishes to prop up the sagging economy.
Indeed, there is already much talk about spurring domestic demand. Last month, President Lee Myung-bak had 10 hours of talks with top economic policymakers and private-sector representatives on how to pull the economy out of a long slump. At the top of the agenda was a proposal to speed up a recovery by generating greater domestic demand.
But participants reportedly beat around the bush, instead of getting straight to the point. What good could be done when families were encouraged, as reportedly suggested at the meeting, to play golf and spend their holidays within the nation?
Instead, the discussions should have been focused on whether or not the nation could afford to wait out the economic downturn and, if not, whether or not the administration should borrow and spend to stimulate growth. The stage was set for such discussions, with consumers tightening their purse strings and corporations withholding investments.
But none dared to take up those issues. That is understandable, given President Lee’s longstanding pledge to balance the budget next year.
Lee cannot have his cake and eat it, too. He will soon have to make a choice between tightening the belt for a balanced budget and spending more to stimulate growth.