[Column] Economy stuck in a perfect storm

While upholding fiscal integrity, aid to the vulnerable class and investment for future growth must continue.

Kim Heung-chong

The author is president of the Korea Institute for International Economic Policy (KIEP). The Covid-19 pandemic is finally turning endemic in its third year. The Ukraine war nears its second year since the Russian invasion last February, wreaking havoc on the global economy. If only a major drought is added to the list, it could meet the conditions for a disastrous world found in history books.

The question is how to weather all the dark clouds. The global economy is treading on thin ice. Hopes for a V-shaped post-pandemic rebound are dashed due to the ripples from the protracted war in Europe. The global growth rate is expected to stop at around 2 percent this year. Worse, it could slip into a recession, let alone a recovery. Europe and elsewhere already shows signs of stagflation. Other countries have no other choice but to control inflation at the cost of their economic growth.

The global economy is grappling with the risks from the mounting debt burden in the private sector from soaring interest rates. The growth of world economy is further constrained by overstretched fiscal expansion during the pandemic and higher geopolitical risks. The fragmentation of global supply chains and fissures in international alliances dissuade people from having optimism about the future of the global economy.

The strangely low unemployment rate despite dim economic prospects is baffling policymakers. The phenomenon can be explained by the formation of a new labor market oriented towards non-contact industries in the wake of the pandemic.

But there are other less positive factors behind the labor shortage. The economically inactive population increased after the pandemic because they refuse to join the labor market. Seasonal or temporary-based migrant labor also has declined. More attention should be given to smoothly increasing labor supply.

What areas should Korea be most attentive this year? The economy could face a deficit streak in the current-account balance due to sluggishness in chips and other key exports, high energy prices, and resumption of oversea travel. The government must pay heed to the mismatch in the balance sheet, the weakness in the non-banking intermediary sector, possible foreign exchange crises in emerging economies and short-term financial woes in national bond markets of advanced countries. A more delicate policy mix is needed to respond to the fragilities of the market from delayed recovery.

A balancing act between price stabilization and financial stability, as well as preemptive guidelines, are necessary in policymaking. While upholding fiscal integrity, aid to the vulnerable class and investment for future growth must continue. Stable supply networks must be established with regards to private-sector adaptability, and readiness must be enhanced against external volatilities.

There are a host of other external factors to consider. China, whose movements greatly affect Korea, suddenly shifted from “zero Covid” to “with Covid” policy. The shock is expected to be large, although it will mostly be concentrated in the first half.

But the real estate slump could cause financial and fiscal risks throughout the year. The structural change in the natural gas market and fertilizer shortage will add upward pressure on energy and food prices. The global supply chains, whose bottleneck is gradually easing, won’t likely go back to the pre-pandemic levels.

The strategy by the U.S. and Europe to localize the sourcing of chips and batteries as strategic assets can pose a challenge to Korea. The negotiations for the Indo-Pacific Economic Framework (IPEF) will likely be wrapped up ahead of the Asia-Pacific Economic Cooperation (APEC) Summit later this year. Although the issue of market access is not included, the negotiations must be dealt with subtly as it involves various sensitive agendas such as labor, environment, human rights, digitalization, supply chain resiliency, and anti-corruption measures. The European Union follows its roadmap on the Carbon Border Adjustment Mechanism from September.

U.S. President Herbert Hoover (1874-1964), whose name remains a fixture with the Hoover Dam, is infamous for making massively incorrect assurance — “Prosperity is just around the corner” — just before the country sank into the Great Depression in the 1930s. No miracle can bring about prosperity this year. But through meticulous study of the various factors and causes of the abnormalities, the worst could be avoided. Let us not lose hope.

Translation by the Korea JoongAng Daily staff.