The World Bank warned of the 1970s-style stagflation, cutting its global economic growth forecast for this year by half of its forecast back in January to 2.9% due to high inflation and stagnant economic growth, which resembles the oil price shock 50 years ago. The OECD reduced the growth outlook of South Korea for this year by 0.3 percentage points to 2.7% and raised the inflation forecast by 2.7 percentage points to 4.8%. The fear of stagflation is affecting markets home and abroad.
The World Bank viewed that the Ukraine war has triggered stagflation fears across the world. The new cold war between the U.S. and China and the global supply chain disruption, caused by the COVID-19 pandemic, which has been exacerbated by the war in Ukraine have together created a situation similar to the oil shock. What is worse, the low growth and the high inflation will continue well into 2024. “We’re facing macroeconomic challenges, including unacceptable levels of inflation in 40 years,” said U.S. Treasury Secretary Janet Yellen.
The inflation crisis is even more menacing in that this is not a problem exclusive to one country. South Korea managed to quickly overcome the 1997 Asian financial crisis and the 2008 global financial crisis by increasing exports to other regions that were not struck by economic crises. This time, however, both advanced and emerging economies have been hit by crisis, and the prices of oil, raw materials, and agricultural products have surpassed the export prices, rendering the previous methods inapplicable. In the past, strong fiscal foundation enabled us to overcome the recession, but that is no longer the case today, when the national debt is over 1,000 trillion won and an increase in government spending may further stimulate inflation.
To minimize the impact of the global economic hurricane and seek a way out from the crisis in good time, structural reforms to enhance economic resilience are essential and urgent. Regulatory reforms to enable businesses to make investment in “super-gap technology” and increase employment are the utmost priority. To lessen substantial burden from businesses and households by cutting taxes, such as a corporate tax and income tax, and reduce inflationary pressure is also necessary.
Restoration of labor-management cooperation and trust is particularly important at present. If workers demand an excessive wage increase citing inflation, which would intensify labor-management conflicts, and businesses transfer the increased wage costs to the prices of goods and services, both consumption and employment would wither away, leading to a lose-lose situation for both labor and management. Now is the time to revive the efforts made in the wake of the 1997 financial crisis by businesses, laborers, and the government to reach a grand compromise.