Economic rebound should trickle down

The Korean economy is showing clear signs of a rebound. The economic growth rate rose by 3.3 percent year-on-year in the third quarter this year, recording the highest level in seven quarters. It was the first time in nearly two years that the economic growth rate hit the 3 percent level since the fourth quarter of 2011. If this trend continues, Korea’s economic growth rate is projected to hit 2.7 - 2.8 percent this year. If the nation’s potential growth rate is estimated at the upper 3 percent level, the third quarter growth rate or the annual growth rate still lags behind the potential growth rate.

The factors that spearheaded growth in the third quarter again after the second quarter were government spending and construction investments. Government spending grew by 3.1 percent year-on-year, while construction investment jumped a whopping 8.0 percent due to the construction of power plants, social overhead capital, and “innovation cities.” These results are from various economic stimulus measures, including the government’s earmarking of extra budget, and the Bank of Korea’s cut in benchmark interest rate.

A number of conglomerates as export champions are spearheading the economic recovery. Samsung Electronics saw its quarterly operating profit exceed 10 trillion won (9 billion U.S. dollars) in the third quarter for the first time ever. The nation’s flagship conglomerates, including Samsung Electronics, Hyundai Motor, and LG Electronics continue to see stellar sales expansion. In contrast, small- and medium-sized enterprises, smaller conglomerates and households have yet to sense the economic rebound. If the economy is to achieve sound growth, there should not be an excessive imbalance between export and import, SMEs and conglomerates, and manufacturing and service sectors. A positive sign is that private consumption, which is highly sensitive to economic rebound, expanded 2.2 percent primarily in non-durable goods and service sectors in the third quarter. However, the sense of recovery should trickle down from the top to the bottom.

Despite a rebounding economy, household debts are more perilous than before. The real estate market appears to be rebounding due to the August 28 measure meant to curb runaway jeonse (rental home based on lump sum key deposit) price, but it is worrisome that government policy designed to encourage consumers to buy homes with loans might worsen the problem with the “house poor.” Externally, a slew of risks, including the appreciation of the won stemming from the U.S.’ move to end quantitative easing, the yen’s falling value caused by the Abenomics policy in Japan, slowing economic growth in China, and financial uncertainties surrounding emerging economies, are lingering to haunt the Korean economy. Korea can hardly afford to take it ease.

What is important is not a short-term rebound but recovery of growth potential. Despite clear signs of economic recovery in the third quarter, facilities investment only grew 1.8 percent year on year. Companies still have an uncertain outlook of the future, and have yet to find viable investment targets. In order for Korea to secure a new growth engine, promote facilities investment, and create quality jobs, the government and political circle should push for drastic regulatory reform, especially the deregulation of the service sector.