Korea's capacity to navigate crises at risk due to soaring household debt

It has been 15 years since the bankruptcy of the U.S. investment bank Lehman Brothers, an event that triggered the 2008 global financial crisis. Korea, once regarded as an honor roll student for successfully navigating that crisis, now finds itself ensnared in astronomical household debt and sluggish growth, prompting growing warnings that it could become an underachiever in overcoming crises. With the global economy roiled by the U.S.-China power struggle, the war in Ukraine, and the looming threat of high inflation in the aftermath of the pandemic, there is great concern that it will fall into a deeper quagmire if a breakthrough is not found.

Korea's growth rate plummeted to the 0% range in 2009 due to the financial crisis, but the country overcame it early, thanks to aggressive fiscal and monetary policies, particularly the expansion of exports through a high exchange rate. However, 15 years later, even in the absence of a major crisis, growth is expected to remain in the low 1% range for two consecutive years. There is even a shocking prediction that 25 years after the Asian Financial Crisis, the growth rate could be lower than that of Japan, which has been experiencing the 'lost 20 years'

The weaknesses of Korea, the 'export powerhouse,' which has been relying on the Chinese market and the semiconductor boom, are being exposed to complex internal and external crises. Domestic demand must hold up if exports are sluggish, but households and the government are also struggling with debt. In particular, household debt, which has exceeded 1,860 trillion won, has become a detonator that could burst at any moment. Over the past 15 years, the ratio of household debt to GDP has surged by more than 35 percentage points, the second-highest among major economies in the world after China. Government debt as a percentage of GDP has doubled, eroding the fiscal space that could be used to stimulate the economy.

The problem is that there is a significant possibility that the turbulence facing Korea's economy may not be just temporary but structurally entrenched. The chip industry can no longer be counted on for dominance, and concerns about the Chinese economy in crisis are rising. Reining in household debt will require intense monetary tightening, which is not easy when a nation is stuck in low growth. More debt-ridden households mean less consumption and reduced economic vitality.

There is no way out but to improve the health of the economy and increase competitiveness through comprehensive structural reforms encompassing labor, regulation, pensions, and education. This will boost productivity and foster an innovation ecosystem. At the same time, the growth of household debt must be curbed as much as possible to prevent household loan defaults and bankruptcies of vulnerable households from becoming a drag on the economy. If we do not take the current crisis signals as a warning to change not only the economy but also the entire country, including politics and society, the 'lost 20 years' will soon become our reality.