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South Korea Facing Serious Challenges

The government says it is too early to say if certain indicators mean the economy is actually losing steam
Production in all industries reduced 0.7% in June from a month ago, marking the first decline in three months.Production in all industries reduced 0.7% in June from a month ago, marking the first decline in three months.

The Organization for Economic Cooperation and Development raised warnings that South Korea’s economy is facing some serious challenges going forward, an analysis of data showed Sunday.

The alarm comes as the organization representing developed market economies with high income adjusted down Seoul’s composite leading indicator, backtracking 0.3 point to 99.2 in June from the previous month, Yonhap reported.

The CLI is designed to provide early estimates six to nine months down the line on fluctuations in a nation’s business cycles linked to economic activity. The Paris-based organization is basing its assessment on numbers provided by the Bank of Korea, Statistics Korea, various economic indicators and movements of the bourse.

A reading below 100 means that things are heading downhill, with the country’s numbers causing worries as it has been heading south for 15 months in a row after peaking at 100.98 in March 2017.

CLI numbers for Asia’s fourth-largest economy previously declined for 20 months straight from September 1999 through April 2001 as it struggled with the fallouts of the Asian crisis.

In addition to weakening numbers, the pace of decline that stood at 0.1 point up till February accelerated to 0.2 point in March.

 Signs of Trouble

The OECD’s declining numbers are not restricted to South Koreas with the average for its members hovering below 100 in the April through June period, but CLI numbers for other countries have only recently started to give ground with the pace of decline being smaller vis-a-vis that for South Korea.

Reflecting this, an assessment of recent economic indicators by the government here showed the coincident and leading economic composite indices all losing ground, which can be considered to be as signs of trouble.

Statistic Korea’s coincident composite index was off 0.2 point recently, the first dip in six months, while the leading number declined in February and March, as well as in June, after staying pat in May.

Related to such warning signs, the government said it is too early to say if certain indicators mean the economy is actually losing steam. It said the present is not the time to officially announce an economic slowdown.

“It is true that if the leading index falls for six straight months it is a sign of a downturn, yet in May of this year, numbers stayed unchanged, making it hard to come to any conclusion,” a government official said. He, moreover, pointed out that there is a need to look at various other factors beyond indices to determine for certain the direction of the overall economy.

 Income-Led Growth

The Moon Jae-in administration has begun shifting its policy stance toward encouraging the private sector to invest and create jobs after a series of failures under his signature “income-led growth”.

The Moon administration has taken a number of pro-labor measures to push for income-led growth, including hiking the minimum wage and reducing working hour, but this has only led to fewer jobs and sluggish corporate investment. This changing policy direction is seen as Moon’s desperate attempt to revive the slowing economy.

As corroborated from recent data showing sluggish private consumption and rising youth joblessness, the incumbent administration failed to boost the economy as it sought through a rapid increase in the minimum wage.

Youth unemployment is near 10%, with corporate investment in equipment and plants dropping 6.6% in the second quarter of this year, from the previous quarter.

 External Uncertainties

South Korea’s economy continued to recover for nine straight months on solid export, a government report said Friday. The ministry of economy and finance said in a monthly economic assessment report that the economy maintained a recovery momentum helped by robust export, Xinhua reported.

The ministry kept the assessment of economic recovery for the ninth consecutive month though signs of economic slowdown were spotted in recent months. The report said external uncertainties spread amid the deepening trade conflict among major economies that led to correction of production and investment.

The government revised down its forecast last month for this year’s economic growth rate by 0.1 percentage point to 2.9%. Private consumption gained 0.6% in June from a month ago, but the government expected the consumption to slow down in the second half of this year.

Production in all industries reduced 0.7% in June from a month ago, marking the first decline in three months.

Facility investment tumbled 5.9% in June from the previous month, keeping a downward trend for the fourth straight month.

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