Spreading economic woes

Spreading economic woes

Rate cut is double-edged sword for faltering economy Following its unexpected interest rate cut Thursday, the following day the Bank of Korea (BOK) lowered the country’s economic growth outlook for this year to 3 percent from its forecast of 3.5 percent in April. The revised outlook will mark the country’s slowest annual growth since 2009, when its economy grew 0.3 percent in the wake of the Lehman Brothers debacle. The central bank cited debt woes in Europe hitting exports, and household debt that is putting pressure on domestic consumption. A day earlier, the central bank cut its key interest rate by 25 basis points for the first time in more than three years. The BOK’s latest moves reflect the reality that Korea’s economic woes are more serious than thought. In fact, slowing exports, coupled with shrinking domestic demand, are casting a dark cloud over the country’s economic prospects. Behind these glooms are the worsening eurozone crisis, China’s economic slowdown and a weak recovery in the United States. China, the country’s largest export market, reported Friday that its economy grew an anemic 7.6 percent in the second quarter, raising fears that Korea might be hit hard by its economic malaise. BOK Governor Kim Choong-soo said the rate cut was a preemptive measure to buoy the economy taken in the midst of increasing downside risks to growth. Yet critics lashed out at the central bank for being ill-timed in its rate cut. This means that if the bank had raised key interest rates earlier, say last year, without being conscious of the government that usually dislikes rate hikes, household debt wouldn’t have swelled that much and it would have been freer to lower rates now. The rate cut is seen as a move to boost exports, which rose a meager 1.3 percent year-on-year in June. Moreover, Korea had no other alternative but to follow in the footsteps of the European Central Bank and China’s central bank that slashed interest rates last week. Brazil cut its rate to a record low Wednesday. Domestic demand remains in the doldrums due to fears about economic slump and asset deflation. More recently, even the rich appear to be tightening their purse strings with sales at discount outlets and department stores falling 7.4 and 1.2 percent, respectively, in June. Given that the rich are hardly affected by the economic slowdown, it suggests that more people have become skeptical about the economic outlook. Prospects for the labor market are also gloomy. The economy added 365,000 jobs last month year-on-year, but this marked the first time since last September that newly created jobs have fallen short of 400,000. Taking into account the latest economic data, the government is feeling the need to boost the economy through all means available. The rate cut is all the more plausible, given that inflation, as measured by consumer prices, has been contained below 2 percent for four months in a row. The rate reduction is a double-edged sword for the economy ― borrowers will benefit from less of an interest burden, whereas there is the possibility that household loans ― 911 trillion won at the end of March ― may begin to bounce back. Simultaneously, it runs the risk of inflating asset bubbles rather than stimulating the economy. With only five months remaining before the Dec. 19 presidential election, some skeptics raise the possibility that another economic crisis could hit the nation next year. True, there is no quick fix to economic woes but the government will have to brace for the worst. Politicians also should refrain from making unrealistic pledges to deceive voters.