Fears of a looming US recession spur massive stock markets

Asian stock markets faced the worst ‘Black Monday’ in history as fears of economic recession in the United States reached extreme levels. In the Middle East, conflict between Iran and Israel has begun over the assassination of the leader of Hamas, the Palestinian armed group. It is crucial for Korea to be fully prepared to deal with major events that could immediately set back the Korean economy into complications.

On Monday, Korea's KOSPI plummeted by 8.77% (234.64 points), sinking to the 2,400 level, recording the largest plunge in history, surpassing the downturn during the pandemic and the global financial crisis. During the day, 98% of KOSPI stocks declined, and the KOSPI index plunged more than 10%, falling below the 2,400 level. The circuit breaker, which suspends trading in the KOSPI and KOSDAQ markets, was also activated in four years and five months. The market capitalization lost in the two markets yesterday alone amounted to 235 trillion won. The stock markets of Japan (-12.4%) and Taiwan (-8.35%) also recorded the largest declines in history.

Fears of a possible hard landing in the U.S. economy drove Asian stock markets into a state of panic. As employment indicators and manufacturing economic indicators deteriorated in July, the outlook that the U.S. economy is rapidly freezing is gaining momentum. The second-quarter performance of big tech companies, including Intel, and news of NVIDIA's next-generation product design flaws raised concerns of an 'artificial intelligence (AI) bubble' and amplified fears of a recession. There is even a possibility of the U.S. Federal Reserve (Fed) taking a ‘big cut,’ lowering the base interest rate by 0.5% point at a time next month.

A hard landing in the United States, the world's largest economy, in addition to China would inevitably send shocks to the global economy, including Korea. In fact, the Korean economy, which is highly dependent on exports to the United States and big tech companies, will be at higher risk. We cannot rule out the possibility of financial market instability spreading to the real economy by further undermining domestic consumption and investment sentiment. To make matters worse, the growing risks of a ‘fifth Middle East war’ are escalating due to rising tensions between Iran and Israel. If the situation in the Middle East leads to an escalation of war, it is highly likely that inflation, which has been stable around the world, may grow unstable.

With external negative factors occurring at the same time, it is concerning that we have no appropriate policy measures. Cutting interest rates to stimulate the economy is outset by concerns of soaring housing prices and household debt. With flat tax revenues anticipated for the next two years, it is not easy to promote domestic demand through quantitative easing. We must overcome the crisis through a combination of sophisticated fiscal, financial, and monetary policies before a bigger storm looms. Minimizing the negative impact of external shocks on the real economy should be the top priority of Korea’s economic policymakers.