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Management Report

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Reviewing Korea's Economy in 2007

Reviewing Korea's Economy in 2007

HWANG In-Seong

Jan. 3, 2008

Transcript

Welcome to our Video Program. I’m Hwang In-Seong from the Macroeconomics Department. Today, we’ll look back at the Korean economy in 2007, and make guesses about how it will perform in 2008.

The Korean economy performed well in 2007 despite highly unfavorable external conditions. 2007 saw the global economy undergo serious adjustments, particularly the financial markets, which had low interest rates and excess liquidity. Nevertheless, the Korean economy grew by 4.8% in 2007, fully achieving the potential growth rate for two straight years.

The Korean economy in 2007 started out weak with 4.5% growth in the first half, followed by stronger 5.0% growth in the second half. Korean economic growth was led mainly by exports rather than by domestic demand.

Consumer sentiment remained weak as the “trickle down” effect has dwindled. The trickle down effect refers to a process by which benefits for the wealthy "trickle down" to benefits for the poor. The bottom 20% of households incurred losses of 350,000 won per month, while small- and medium-sized enterprises, which account for 84% of the nation’s total employees, suffered sluggish sales.

Although the labor market looked stable with the unemployment rate at around 3-3.5%, the job market was in fact unstable with the number of struggling jobseekers estimated at 550,000. Worse, 1.3 million of the jobs held by young workers were on a temporary basis. Let’s take a closer look at the issues.

First, the Korean economy finally attained the landmark of $20,000 in per-capita income. It took 12 years for Korea to reach this level of $20,000 after reaching $10,000 in 1995. This was about three years slower than industrialized countries.

However, in terms of contribution of real GDP to per capita income, Korea surpassed industrialized countries, indicating that income levels were achieved through economic capabilities rather than by external factors like exchange rate shifts and changes in consumer prices.

Second, the stock market opened a new chapter as the KOSPI broke 2,000 points. It took 18 years for the KOSPI to reach 2,000 points after passing 1,000 points in 1989. Market capitalization also surpassed the 100 trillion won level on the back of improvements in business performance. PBR exceeded 1 for the first time in ten years, indicating that stock price exceeded book-value.

Due to the slowdown in the real estate market, the holdings of equity funds ballooned to 107 trillion won in late November 2007 from 46 trillion won in late 2006. Equity funds siphoned off excessive liquidity, adding to the rising stock prices. In sum, 2007 marked the first year when savings in Korea gave way to investment.

Third, uncertainty grew sharply across the financial markets, triggered by the US subprime mortgage problems, which first appeared in February and burst into full view later. Each time, the global financial market showed signs of a credit crunch, with the won-dollar exchange rate fluctuating.

On the domestic front, money moved rapidly to money market accounts, causing the banking industry to face a shortage in the money supply. To offset the lack of funds, the industry churned out more CDs and bank bonds, with CD interest rising to 5% for the first time in 4 years.

Fourth, key conventional industries chalked up robust growth, while the IT industry suffered sluggish performance. Thanks to rising demand from the Middle East and emerging economies, coupled with accumulated technological prowess, key conventional industries saw their exports and sales register year on year growth of 21% and 12% respectively in the first nine months of this year. In contrast, the IT industry recorded a mere 7% growth in sales during the corresponding period largely due to oversupply and a decline in unit cost.

Last, the domestic housing market has cooled due to a string of government policies designed to stabilize housing prices. These measures led to a 12% decline in housing transactions from January to September of last year. Furthermore, construction companies have maintained a high-price strategy while expanding into local areas, thereby leaving over 100,000 units unsold. This marks the first time since 1998 that unsold units have exceeded 100,000.

The largest issue facing the new administration will be how to make the Korean economy take its next step forward. Many believe that the results of the 17th presidential election reflect the desire of the public to regain dynamism in the economy. However, numerous unfavorable factors still exist both at home and abroad, including a slowdown in the global economy, global financial instability, and excessive household debt. Given these conditions, Korea will likely face difficulty in sustaining current growth rates if it fails to commit sufficient economic resources and effort.

To fulfill the promise of the new year, the Korean economy will need to bolster domestic demand. To this end, the government needs to expand consumption by alleviating de jure and de facto taxes, and encourage businesses to increase investment by providing them with the incentives to develop new growth engines.

The government also needs to upgrade the competitiveness of weak sectors, particularly small- and medium-sized businesses and the service sector. Labor shortages facing small businesses can be resolved through collaboration with large businesses, while the service industry needs to leverage the Korea-US FTA in order to enhance its competitiveness.

To better cope with the potential for expanded risk in 2008, the government also needs to place more focus on risk management. Better monitoring systems will be needed, not only for the international financial market, but also for the domestic real estate loan market.

Thank you for watching. I’m In-Seong Hwang.

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