Like so many other economies around the world, South Korean economy is being affected by debt crisis in Europe. Currently Korean government reports show that the GDP(Growth Domestic Product) did not grow as much as it did in the second quarter of 2011. Why is the South Korean economic growth becoming slower? Is it simply due to the European debt crisis? Will the economy continue to grow slower or will it recover in the fourth quarter of 2011? By comparing two articles, one from Korea Joongang Daily (one of the top four newspapers in South Korea), and another relatively short article from BBC News, we will try to find the answer to these questions.
According to BBC News, Korea's future economic perspective is gloomy. It views that Europe's economic downturn caused by the debt crisis and slowdown of the US economy will negatively affect South Korean exports. Since half of South Korea's GDP relies on exports, the article believes that the South Korean economic outlook is not bright. Also, it mentions about the high level of debt that South Korean household contains. Due to this high level of debt, the article says that households will avoid consuming, trying to pay back its debt and interests. Therefore, since two components of GDP are likely to shrink, the article says that GDP growth will not show large growths as the Bank of Korea (BOK) predicts it to be.
Korea Joongang Daily shows further pessimism to Korean economic growth but with different reasons. It mentions how the BOK's optimistic estimates of GDP growth have been proven wrong. Although the BOK says that the due to decrease in the exchange rate, exports have risen and therefore, predicts that GDP growth will rise in the fourth quarter, the article shows fear for the impact of other domestic problems to the economy. It writes that the currently due to the impact of over-investment in housing, Korean households hold large amounts of debt. This debt is causing decrease in demand for consumption. Due decrease of consumption, firms are also trying to keep hold of cash instead of investing for new facilities. According to Korea Joongang Daily article although the exports rise, due to decrease in consumption and saving, it predicts that the Korean GDP will not grow that much.
Also, the Korea Joongang Daily article shows fear for stagflation of the economy. Stagflation is an economic phenomenon which happens when prices continue to rise during recession. The current Korean economy is hard to define that it is in a recession since the GDP is increasing rather than showing negative growth rate. However, the Korean economy is surely experiencing less consumption and less investment by firms, showing signs for potential recession. This is surely a problem in Korea since even though the economy is experiencing inflation where asset prices and incomes go up, consumption is low. However, I believe it is too much of an exaggeration in the current situation to predict South Korean economy to have stagflation.
By reading two articles, it is seen that the future Korean GDP growth will not be positive as the BOK expects it to be. For the reasons for the slowdown of GDP growth, Korea Joongang Daily seems to give more reasonable reasons that explains the current economic data. Unless exports grow in large amounts, which extremely unlikely due to current economic situations in the US and Europe, Korean economic growth will cool because of decrease in consumption due to large household debt and decrease in investment by firms in reaction to the shrinking consumption.
Well, I certainly wish better things for the South Korean economy than what the poor U.S. economy is experiencing! Even after so much time and so many experiences, though, it's hard to turn such a problem around, even when you can see that it exists and identify some of the causes.
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