Figures released by the national statistics office last week have raised concerns that the April 16 ferry disaster might go beyond dampening consumer sentiment to eventually undermine the still-fragile economic recovery.
The industrial output index, which covers the manufacturing and mining sectors, rose by 0.1 percent in April from the previous month, down from a 0.9 percent gain in March, according to data from Statistics Korea. Production in the service sector shrank by 1 percent in April, with domestic tourism and retail spending depressed by the somber mood following the ferry sinking that claimed more than 300 lives.
Certainly, one must be cautious not to read too much into the short-term data and paint an exaggeratedly gloomy picture of the economy. It has yet to be seen whether the slower pace of output growth and reduced consumer spending will lead to the economy slipping into a downturn.
On a brighter note, corporate investment in plants and machinery remained relatively strong in April, expanding by 2.6 percent from a month earlier. Construction investment also grew by 6.9 percent.
The impact from the ferry accident may be seen as a one-off factor causing the economy to underperform for a certain period of time. But compounded with other challenging economic conditions that are likely to go from bad to worse, the prolonged effect of the tragedy could be holding back the recovery.
In a reflection of this concern, the state-run think tank Korea Development Institute recently lowered its growth outlook for this year, citing a slowdown in private-sector spending in the wake of the maritime accident. Business sentiment among Korean manufacturers also slipped from 86 for May to 81 for June, marking the lowest level in four months, according to a survey released by the central bank last Friday.
With domestic consumption remaining sluggish, the economy will have to continue relying on exports to maintain growth. On Sunday, the Ministry of Trade, Industry and Energy released figures that showed the country’s exports dropped by 0.9 percent from a year earlier in May. As ministry officials noted, the slight decrease might be attributed partly to a reduced number of working days that month.
The ministry predicted Korea’s exports would continue to expand in the coming months, largely on the back of recoveries in developed markets. But it is not guaranteed that a rebound in the U.S. economy, which contracted for the first time in three years in the first quarter under a severe winter, will be strong enough. Furthermore, a sharp rise in the value of the Korean won against the U.S. dollar and other major currencies, coupled with a slowdown in China’s economy, may dampen the country’s shipments overseas.
These circumstances raise the need to redouble efforts to boost domestic spending and galvanize the service sector to keep up the momentum of the recovery. The government last week announced a set of measures to promote consumer spending, including the sale of traditional market vouchers at a discounted price. But economic policymakers seem to acknowledge that their effect may be limited.
More drastic efforts should be made to enhance domestic consumption, particularly by more affluent families, with overseas credit card spending by Koreans increasing from $2.48 billion in the first quarter of 2013 to a record high of $2.83 billion in the fourth quarter. The figure remained little changed at $2.82 billion in the January-March period of this year.
President Park Geun-hye’s administration should also carry through its deregulation drive to facilitate private-sector investment, especially in the service sector. A shortage of tax revenue hinders further fiscal stimulus. The government, however, needs to consider allotting more money for renovating old infrastructure and facilities across the country, which will not only improve safety but also help reinvigorate the economy.
It may be hard to expect incumbent economic policymakers, some of whom are likely to be replaced in the upcoming Cabinet reshuffle, to take on these tasks wholeheartedly. But they are responsible for doing their best until their last day in office to keep the economy on track to sustainable growth.