Korean economic outlook for 2009

The economic crisis unleashed in 2008 is far from over. During the coming year, the world is preparing to see the consequences of the global financial sector’s collapse. A report by the Samsung Economic Research Institute (SERI) states that South Korea will experience a reduction in growth and an increased fear of unemployment, but added that it is far from entering into a recession.

The report, from one of Korea’s leading think tanks, is entitled Outlook for Korea's Economy in 2009. It states that South Korea faces a weakening growth because exports, its principal economic pillar, have dropped.

The report’s authors are of the opinion that 2009 will be a year in which the Korean economy shrinks and firms have less access to credit. This, in turn, will lead the government to implement measures aimed at reducing the impact and encourage investment, according to the report.

Immediate effects

According to the report, problems began the second half of the year, when the financial sector collapsed and the global credit system began to shut down. This resulted in liquidity problems for banks and firms, affecting the output of Korean capital and reducing its exports.

This, in turn, led to a fall in domestic demand resulting in a 5% drop in consumer prices, which is not entirely positive because of lower corporate earnings in a time of crisis and an emerging threat of layoffs.

Moreover, the combination of poor economic performance and external uncertainty caused fluctuations in share prices and the relation of Korea’s won to the dollar.

Prospects for 2009

According to the Samsung Economic Research Institute, the panorama of uncertainty will continue during 2009, leading to expected growth of 3.2%, a bit less than the previous expectations of nearly 4.5%. This is because external conditions are likely to get worse before they get better as a result of the recession in industrialized nations.

Internal conditions for 2009 in Korea are expected to be marked by fluctuating interest rates, a volatile won and a faltering stock market. This will mean further reductions in domestic and external demand.

Side effects of the global financial crisis, such as rising oil and raw materials prices combined with currency depreciation, may result in decreased infrastructure investment and construction (the real estate sector has also been severely impacted). Investment may be reduced by 2.3% during 2009, if the decline in exports affects manufacturing sector investment levels.

Despite the expected decline in prices of raw materials and oil, which may ease inflation, it is not clear whether or not this will affect demand. Thus, generating new jobs is expected to be difficult.

Responding to the crisis

When the crisis erupted, the Korean government tried to support the economy with the establishment of a stabilization fund for the bond market. Unfortunately, firms have still not managed to obtain more capital. This is, in fact, the source of the crisis, whereas banks began to fold under the weight of their subprime liabilities.

The Samsung Economic Research Institute states that financial institutions should deliver more funds to the corporate sector. It also feels the government should help with the real estate sector. Lastly, it welcomes other measures, such as increasing domestic demand via tax cuts, deregulation and increased fiscal spending.