Korean economy 'on the verge of possible deflation' - The Korea Times

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Korean economy 'on the verge of possible deflation'

Gov't unveils measures to tackle demographic challenges

By Kim Bo-eun

Concerns of deflation are growing with the Korean economy showing signs of sliding into deflationary malaise due to a toxic mixture of low inflation and anemic growth amid falling exports and sagging investment.

Despite mixed views, some experts believe such conditions, along with the shrinking working population, make Korea vulnerable to a period of long-term stagnation similar to the one that Japan underwent from the early 1990s to 2010.

Also referred to as the "lost 20 years," this was the period from 1991 to 2000 in Japan when nominal GDP and real wages fell while the economy experienced a stagnant price level.

"The Korean economy is in a difficult position, recording one of the slowest rates of growth among OECD countries and on the verge of possible deflation," Sohn Sung-won, professor of finance and economics at Loyola Marymount University, told The Korea Times in an email interview.

Sohn's concern is based on the latest data on Korea's key indices.

According to Statistics Korea, consumer prices fell for the first time since 1965, since related data started to be compiled. Data shows the Consumer Price Index stood at 104.81 in August, which is down 0.04 percent from 104.85 a year earlier.

The country's growth rate has also slowed down due to sluggish exports and corporate investment, marking 1 percent in the second quarter of this year, after contracting 0.4 percent in the previous quarter.

Based on these figures and forecasts that exports will remain sluggish due to the ongoing trade war between the U.S. and China and between Korea and Japan, it appears it will be difficult for Korea to achieve the Bank of Korea's estimate of 2.2 percent, much less the Ministry of Economy and Finance's 2.4 to 2.5 percent. Korea's economy grew by 2.7 percent in 2018.


What is of more concern is that structural issues, such as population aging and low birthrates, are reducing the country's working population, undermining growth potential and building up deflationary pressure.

Data from the statistics agency shows people aged 65 or older could account for 46.5 percent of the country's population in 2067, as the population reduces to 39 million. The population currently stands at 51.7 million.

This would make Korea a super-aged society, where more than 21 percent of the population are 65 years or older.

At the same time, Korea's birthrate of 0.98 children per woman in 2018 puts it among the countries with the lowest fertility rates.

This is a phenomenon Japan underwent earlier. Japan is already a super-aged society, with 26.6 percent of its population aged 65 or older as of 2015.

Its population shrank for the first time in 2015 by 0.8 percent since the previous census five years earlier, based on the low fertility rate.

"Korea faces similar demographic challenges and has followed a similar economic path as Japan," Troy Stangarone, Senior Director at the Washington-based Korea Economic Institute, said.

Mauro Guillen, a professor at the Wharton School of the University of Pennsylvania, noted the negative implications. "We know from experience, and not just in Japan, that aging populations put a brake on economic growth," he said.

Recognizing these concerns, the government unveiled a set of measures Wednesday to tackle population aging.

At an economy ministers-related meeting, Finance Minister Hong Nam-ki said that the government is reviewing plans to introduce a system to oblige businesses to extend employees' contracts after they reach the age of 60.

The government is also considering creating a new type of visa to attract foreign talent, which would enable individuals to reside long-term as well as bring their families here.


Gov't unveils measures to tackle demographic challenges

By Kim Bo-eun

Concerns of deflation are growing with the Korean economy showing signs of sliding into deflationary malaise due to a toxic mixture of low inflation and anemic growth amid falling exports and sagging investment.

Despite mixed views, some experts believe such conditions, along with the shrinking working population, make Korea vulnerable to a period of long-term stagnation similar to the one that Japan underwent from the early 1990s to 2010.

Also referred to as the "lost 20 years," this was the period from 1991 to 2000 in Japan when nominal GDP and real wages fell while the economy experienced a stagnant price level.

"The Korean economy is in a difficult position, recording one of the slowest rates of growth among OECD countries and on the verge of possible deflation," Sohn Sung-won, professor of finance and economics at Loyola Marymount University, told The Korea Times in an email interview.

Sohn's concern is based on the latest data on Korea's key indices.

According to Statistics Korea, consumer prices fell for the first time since 1965, since related data started to be compiled. Data shows the Consumer Price Index stood at 104.81 in August, which is down 0.04 percent from 104.85 a year earlier.

The country's growth rate has also slowed down due to sluggish exports and corporate investment, marking 1 percent in the second quarter of this year, after contracting 0.4 percent in the previous quarter.

Based on these figures and forecasts that exports will remain sluggish due to the ongoing trade war between the U.S. and China and between Korea and Japan, it appears it will be difficult for Korea to achieve the Bank of Korea's estimate of 2.2 percent, much less the Ministry of Economy and Finance's 2.4 to 2.5 percent. Korea's economy grew by 2.7 percent in 2018.


What is of more concern is that structural issues, such as population aging and low birthrates, are reducing the country's working population, undermining growth potential and building up deflationary pressure.

Data from the statistics agency shows people aged 65 or older could account for 46.5 percent of the country's population in 2067, as the population reduces to 39 million. The population currently stands at 51.7 million.

This would make Korea a super-aged society, where more than 21 percent of the population are 65 years or older.

At the same time, Korea's birthrate of 0.98 children per woman in 2018 puts it among the countries with the lowest fertility rates.

This is a phenomenon Japan underwent earlier. Japan is already a super-aged society, with 26.6 percent of its population aged 65 or older as of 2015.

Its population shrank for the first time in 2015 by 0.8 percent since the previous census five years earlier, based on the low fertility rate.

"Korea faces similar demographic challenges and has followed a similar economic path as Japan," Troy Stangarone, Senior Director at the Washington-based Korea Economic Institute, said.

Mauro Guillen, a professor at the Wharton School of the University of Pennsylvania, noted the negative implications. "We know from experience, and not just in Japan, that aging populations put a brake on economic growth," he said.

Recognizing these concerns, the government unveiled a set of measures Wednesday to tackle population aging.

At an economy ministers-related meeting, Finance Minister Hong Nam-ki said that the government is reviewing plans to introduce a system to oblige businesses to extend employees' contracts after they reach the age of 60.

The government is also considering creating a new type of visa to attract foreign talent, which would enable individuals to reside long-term as well as bring their families here.


Kim Bo-eun bkim@koreatimes.co.kr


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