Will Spring Come to the Korean Economy?

Will Spring Come to the Korean Economy?. February. 02, 2005 22:45. by Joong-Hyun Park sanjuck@donga.com legman@donga.com.

Korea’s major state-run and private economic research institutes have recently expressed their concern over the hope of the economic revitalization that is recently emerging in some corners of society.

Their worries are based on the understanding that there are still enough economic risk factors, as households’ spending power has yet to be recovered due to the heavy debts that still linger, and export prospects are uncertain because of the dropping won exchange rate against the dollar (the won appreciation).

The Korea Development Institute (KDI) expected in its “Report on the Domestic Economic Trends” released on February 2 that “considering the tendency of all indicators, the domestic economy seems to be still on the decline.”

The KDI report expected that it would take considerable time to recover consumption as it requires reduced household debts and an improved employment environment as a result of economic revitalization.

It also analyzed that investment is not easy to pick up either, as large conglomerates are showing the tendency of cautious investment considering profit rates and small- to medium-sized companies have had insufficient room for making an investment.

Moreover, the report predicted that the export environment of domestic companies would worsen as the won exchange rate against the dollar is likely to drop further.

The Samsung Economic Research Institute (SERI) also pointed out in a report, “The reason for prolonged sluggish consumption and ways to escape it,” that the increase in department store revenue that occurred early this year was likely the result of a one-off phenomenon caused by the cold weather, as the sales increase was mainly reported in products like underwear, bedclothes and heating home appliances.

The SERI reported, “It is hard to say that consumption entered the recovery phase in earnest as the revenue prospects of the traditional markets in the first quarter of this year (January to March) are worse than those in the fourth quarter of last year (October to December),” expecting that consumption this year would show a modest recovery from last year by around three percent.

Also, the institute cited as the reasons for prolonged sluggish consumption as follows: the slow rise in the income increase rate and decreased spending power due to increases in taxes and quasi-taxes, the adjustment of household debts due to increasing repayment, psychological shrink due to the job insecurity, increased overseas spending including tourism and education, and the insufficient efforts of businesses and the government.

Meanwhile, the Federation of Korean Industries released “Research on business economy” which showed that the Business Survey Index (BSI) prospects of the top 600 conglomerates in terms of revenue in February this year stayed at 85.7.

The figure was up 7.9 from January’s BSI prospect score (77.8), but there are still larger numbers of businesses which negatively evaluate the economy as the index failed to exceed 100, the standard figure, for nine consecutive months starting from June of last year.