Three agonies: COVID-19, inflation, interest rates

South Korean President Moon Jae-in presided over the ministerial meeting on public livelihood at Cheong Wa Dae on Wednesday, in an apparent effort to devise countermeasures against the economic changes that are unfolding in an unexpected way, contrary to the economic outlook announced at the end of June. A month ago, the president confidently predicted a turnaround. “The economy is recovering much faster than expected, beating our previous growth estimate of 3.2% and leading the growth rate to reach as high as 4%,” Moon said last month.

However, as the country battles with the fourth wave of the COVID-19 pandemic, the economy is rapidly falling into uncertainty. Consumer spending has dropped considerably. The consumer price index that increased for six consecutive months plunged in July; the small business owners are closing their doors permanently with a ban on dine-in services to a group of more than three people after 6 p.m.; the global semiconductor shortage also impacted negatively on South Korea’s Q2 exports, which fell into a negative territory in just a year.

Economic experts worry that the Korean economy may fall into stagflation should this situation continue. In fact, while stating that the International Monetary Fund upgraded Korea’s annual growth rate to 4.3%, President Moon also said that the economic turnaround is less likely to be forthcoming if quarantine measures are not properly adapted. The current crisis might not come to an end so shortly as we all want.

The government needs to prepare for a long battle by sparing financial resources in case of prolongation of the ban on small business operations. The supplementary budget scheme has its limits; the stimulus checks would not boost consumer spending but may only increase the government debt. By September, when the grace period for repayment of principal loan lent to the SMEs and small business owners ends, the government needs to carry out the restructuring of marginal businesses. Above all, the establishment of fiscal discipline needs to be expedited to prevent the national financial condition from deteriorating due to political power struggle.