Even with a new government poised to try guide the nation to clearer waters, the economy is seen as unlikely to pick up soon as global markets have yet to show signs of a rebound.

“Our economy is still too dominated by exports, and recovery seems out of the picture for many of the countries around the world, so it’s hard to say that the economy will improve drastically in the New Year,” said Cho Young-moo, a senior research fellow at LG Economic Research Institute.

The U.S. economy, still clouded by uncertainty surrounding talks on avoiding the fiscal cliff, is expected to slow to a 2.1 percent growth rate next year, down from 2.3 percent this year, according to the LG think tank.

The think tank said that Europe, which is mired in an ongoing financial crisis, would continue showing minus growth, while Japan, estimated to have posted 1.7 percent growth this year, would find it difficult to achieve even 1 percent growth.

The situation has become so severe that government think tanks here are calling for Korea to turn away from these traditional trade partners to pivot towards its Asian neighbors.

“Asia is already the world’s next big consumer, and we must capitalize on our ties with our close neighbors, such as ASEAN, to keep our partners diversified and focus on markets that are manifesting more robust growth,” said Seo Jin-kyu, a researcher at the Korea Institute of Economic Policy.

China, Korea’s No.1 trade partner, is expected to bounce back to a 8.4 percent growth rate this year from this year’s 7.9 percent estimated by renowned institutes such as the World Bank, so that will be another reason to keep looking toward Asia, pundits say.

Government slashes growth forecast

Aware of the negative forecasts, the Finance Ministry last forecast that the economy would grow by around 3 percent, which was 1 percentage point lower than the 4 percent growth the ministry forecast just three months earlier.

At the beginning of the year, the government had forecast an even rosier outlook of 4.6 percent.

“The economy probably will pick up a bit in the latter half of next year, but that still won’t spell a complete and full rebound,” said Choi Sang-mok, head of the ministry’s economic policy bureau.

Unless the government is able to turn things around, there will be less jobs to go around ― the ministry forecast that 320,000 new jobs would be added this year, down from 440,000 last year ― while consumer prices would rise 2.7 percent, up from last year’s 2.2 percent.

According to the LG institute, more than 400,000 people found new jobs last year, but most were in the form of self-proprietors, many of whom ended up folding their business not long after they started.

LG therefore had a gloomier outlook for the job market as it expected the economy to add less than 300,000 new jobs this year.

President-elect Park Geun-hye is aware of how much sits on her shoulders as the leader elected in these tough times.

She didn’t come right out and say so, but her aides complained that it doesn’t help the new government when the outgoing one departs with such a bleak outlook on the economy.

But as experts say, macroeconomic policies usually don’t differ too much. How the economy will perform depends more on how microeconomic and corporate policies pan out, as after all, they decide the overall market sentiment.

Buttressing corporate sector

Exactly how effective Park is in implementing her policy pledges for buttressing the corporate sector will be crucial, said observers.

“Park’s ideas to jumpstart the corporate sector to ignite domestic consumption, which is one of the fundamental problems of the economy, sound like a sound economic objective. However, how these measures will in turn help the middle class recover will be another matter,” said Huh In, a senior researcher at KIEP.

The president-elect earlier promised that she would help create a more level playing field in all sectors to ease social and financial disparity.

But there are lingering concerns about how Park can expect to achieve her goals when the conglomerates are clamoring for the president-elect to show more support for the bigger business sector to revive the economy.

“Helping the bigger companies is necessary in order to see a spill-over effect, such as in the form of facility investment and more jobs to go around,” said the Korea Chamber of Commerce and Industry here.

Park, for her first step in engaging the corporate sector, following her election, met with small and mid-sized company representatives to assure them of her unwavering support before going on to greet the owners and heads of local conglomerates.

When business conditions worsen, typically, the smaller firms feel the heat more as many serve as vendors for the conglomerates and other large companies that will simply not give them enough business.

Many also are manufacturers that export their goods outside, so sluggish global market conditions are expected to take a toll on them in the New Year.

The business survey index, measuring the corporate sector’s business sentiment, rose slightly last month, with companies expecting the economy to pick up slightly this year.

The BSI figures announced by the Bank of Korea last week showed that in particular, manufacturers surveyed in December expected better business conditions this year.

Large companies also showed a higher index, while small and mid-sized firms remained unchanged. The figure for export companies, however, fell from the previous month, mostly due to the less-than-sanguine forecasts for the global economy.

Domestic consumption still floundering

Anemic global economic conditions, however, are an issue that’s impossible for Korea to solve. The issue it can address in its place is the sluggish domestic demand, which has been a nagging problem for the local economy.

Hit by skyrocketing debt ― mostly to buy homes ― and amid a sluggish economy and nowhere to invest in, people simply are choosing to keep their purses shut.

Or rather, when considering that savings rates have hit record-lows, people just don’t have the money to spend on anything besides their daily essentials.

Figures from the statistical office show that a four-person family needs at least 3 million won per month to get by, but many households are saddled with debt or even without it, are unable to make ends meet on account of high education and grocery costs.

The Bank of Korea recently said up to 1.57 million households are seen to be “house-poor,” a term indicating people who despite having homes to their names, are financially destitute because they are strapped with excessive debt they took out to purchase their homes.

The central bank figures also showed that the debt ratio of the financial portfolios of home-owners reached 170 percent this year, up 6 percentage points from 2011.

As of November, there were 3,000 homes that were put up for auction in the metropolitan area.

Further, rent prices also are rising as if the sky’s the limit, with prices going up by more than 30 percent since 2008 to breed “rent-poor” households consisting of families that pay their rent with debt.

Given the rising cost of maintaining a home and in general, a living, Koreans are becoming less and less able to open their purses to make the necessary purchases that will help the economy pick up by getting the consumption cycle going again, industry watchers say.

As the real estate market flounders, people also are having difficulty finding the right investment opportunities, especially since the stock market has not fared any better this year.

Hopes for bullish stock market

The bond market was overheated last year as investors avoided risky assets amid slow recovery of the U.S. and Chinese economies and delayed resolution of the eurozone fiscal crisis.

Market observers consequently forecast that the stock market, currently underestimated, will rise as a more attractive investment outlet this year on favorable performance of IT, petroleum, chemicals and steel sectors.

“Considering the present yield levels in the bond market, bonds will no longer attract investment,” said Bae Jae-hyun, an analyst at Hanwha Investment and Securities.

“Riskier assets such as stocks are likely to draw more investors this year.”

Analysts had varying views, however, on when the stock market would turn from bearish to bullish.

Those who project a V-shaped rebound from bottom said the U.S. fiscal cliff issue and sluggish corporate earnings in the past three months would weigh on the stock market in the first half of next year.

“Market uncertainties will climax by the end of the first quarter of 2013 due to such factors, but stock prices will rally in the second and third quarters once the U.S. fiscal woes are eased and the European and Chinese economies recover,” said Kim Hyung-ryul, senior analyst at Kyobo Securities.

Tongyang Securities said the stock market would rebound earlier, in the first quarter, as U.S. authorities reach a compromise on the fiscal cliff, the European fiscal crisis stabilizes and the Chinese economy picks up.

Most brokerages recommended increasing the portion of IT stocks in investment portfolios.

Petroleum, chemicals and steel, stocks that are sensitive to changes in the economic cycle, were also widely suggested.

Many including Hyundai Securities, Kiwoom Securities and Daishin Securities gave a “buy” for consumer goods manufacturers on expectations that emerging economies such as China will recover.

Won expected to continue its rally

Most economic think tanks expect the Korean won to continue its rally against the U.S. dollar this year.

The greenback will keep losing its value on U.S. fiscal cliff woes and remaining uncertainties over external conditions such as the eurozone fiscal crisis, both state-funded and private research institutes said.

The pace of the dollar’s fall will depend on the inflow of global liquidity into Korea and whether Korea continues to post a current account surplus, they said.

Seoul’s foreign exchange authorities will keep intervening in the FX market next year, limiting the chances of a sharp decline of the greenback.

“The most important external factor that would determine the level of the dollar this year is the length of quantitative easing by major economies such as the U.S. and Japan,” said Samsung Economic Research Institute.

“The Eurozone fiscal crisis and the stalemate over the U.S. fiscal cliff are the other key factors.”

LG Economic Research Institute and POSCO Research Institute projected an annual average of 1,050 won and 1,080 won per dollar, respectively, this year. 

The outlooks of Hyundai Research Institute, Hana Institute of Finance and Korea Institute of Finance ranged between 1,050 won and 1,065 won per dollar on annual average.

By Kim Ji-hyun and Kim So-hyun
(jemmie@heraldcorp.com) (sophie@heraldcorp.com)