Trade conflict, debt to weigh on economy

The Korea Times

The Korea Times

Finance

Sun, October 1, 2023 | 21:02

Economy

Trade conflict, debt to weigh on economy

Posted : 2018-12-23 15:55

Updated : 2018-12-24 10:09

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AMRO suggests policy to boost private sector for job creation

By Park Hyong-ki

The ongoing trade conflict between the United States and China will weigh on Korea's growth in 2019, according to the ASEAN Plus Three Macroeconomic Research Office (AMRO).

In the annual analysis report for Korea issued Dec. 21, AMRO said Asia's fourth-largest economy also faces risks stemming from vulnerable levels of debt held by the self-employed and low-income earners.

A rise in the interest rate in line with the speed of the United States' monetary policy normalization would increase such risks to the local financial system.

And should the job market worsen for the low-income group, it would not only have an adverse effect on their wellbeing, but also the asset quality of lenders.

The household debt in proportion to disposable income stood at 160 percent as of the end of the first quarter of 2018. And AMRO said this is "still high."

"Headwinds to the growth outlook would come from more-severe-than-expected spillovers of global trade tensions … an escalation of the U.S.-China trade conflict poses downside risks to Korea's highly open economy," AMRO said in the report.

"Low-income and self-employed borrowers remain vulnerable to financial distress due to low income and low financial assets relative to debt."

The research office wrote the report after its group of economists visited Korea, including lead economist Sumio Ishikawa, from Aug. 27 to Sept. 5 to review the economy.

Established in 2011 in Singapore by 10 ASEAN member states and Korea, Japan and China, AMRO is Asia's regional macroeconomic surveillance unit.

AMRO projected Korea to grow 2.7 percent in 2018, and 2.6 percent in 2019. The current account surplus is expected to be at 5.3 percent of the GDP in 2018, dropping slightly to 4.9 percent in 2019.

The Korean economy with a focus on exports of tech products, including semiconductors, is susceptible to slowdowns expected in China and advanced economies amid an outlook for global tech downturns, it added.

And the declining competitiveness of its manufacturers will continue to weaken investments, and ultimately jobs.

The research office suggested the government implement an expansionary fiscal policy to tackle domestic and global challenges.

It still has ample fiscal resources from positive tax revenue to pursue structural reform and innovation.

"The active use of fiscal policy to pursue the inclusive economic growth objective and promote innovation-led growth, while maintaining long-term fiscal sustainability, is commendable," the research office said.

This should be "complemented by a growth-oriented policy in a well-coordinated manner" to revive demand that can lead to improvements in people's incomes and livelihoods.

"The initiative to enhance households' standard of living, however, should be implemented in such a way to avoid creating persistent and adverse consequences for the labor market," it said.

"It is essential to strike a balance between labor policy and industrial policy for future job creation and economic growth. The government should continue its efforts to increase labor demand in the private sector, promoting new innovative industries in the manufacturing sector and expediting regulatory reform in the service sector."

hyongki@koreatimes.co.kr