[Square] Post-Corona, A New Balance for the Korean Economy

The domestic and international risk environment surrounding the Korean economy is rapidly deteriorating due to the impact of the novel coronavirus infection (COVID-19) pandemic. It is clear that this is a time to concentrate all policy capabilities on crisis response to the COVID-induced economic shock. However, what is even more important is that the COVID-induced economic crisis is acting as a trigger that goes beyond a simple economic shock and is reshaping the order of the global economy.

Historically, large and small economic crises have shown strong resilience after shocks, typically undergoing a 'U'-shaped recovery process. During the 2008 financial crisis, real GDP plummeted to 0.8% in 2009 but recovered to 6.8% in 2010. The recently released IMF growth forecast for the Korean economy is similar. Although a contraction of -1.2% is inevitable this year, it is expected to recover to around 3.4% next year. The question is whether this will be the case again.

Since the global economy is entering uncharted territory after the COVID-19 shock, it is highly likely that our economy will also move toward a new equilibrium rather than returning to its previous state. Former U.S. Secretary of State Henry Kissinger warned that "even after the COVID-19 pandemic subsides, the world will never be the same, and the world order will be changed forever." The post-COVID economy is overshadowed by a confirmation bias toward 'contactless and non-face-to-face' interactions. This makes it difficult to gauge the nature of the risks our economy faces and what the new equilibrium will be.

First, 'low growth' is becoming a new standard widely accepted across the global economy. A global demand contraction comparable to the Great Depression is increasing deflationary pressures worldwide. This is especially because demand sources such as the advanced countries’ consumer markets in the 1980s and 1990s, and China’s raw material demand in the 2000s, which had driven emerging economies, no longer exist. The reason our economy faces the unprecedented 3 lows (3低) risk?low growth in the 0% range, low interest rates, and low inflation?is closely related to this. In other words, we are confronted with the challenge of overcoming chronic consumption stagnation and negative corporate investment growth.

Second, the post-COVID economy is finding a new balance in the direction of the disintegration of global supply chains and the dismantling of cross-national production collaboration structures. The U.S. reshoring policy, which brings core production bases back to the home country, is rapidly spreading as a common industrial policy. The paradigm of industrial policy is shifting toward job creation through 'regionalization of industry.' This means that a new policy roadmap must be devised within the framework of national industrial strategy to attract core manufacturing companies.

Third, social and economic structural changes led by 'contactless and non-face-to-face' interactions are reorganizing a new industrial order on top of digital technology. Even among the world’s top 10 companies, platform-based technology innovation giants dominate. However, the rise of untact industries that erode employment inevitably leads to industrial restructuring accompanied by structural unemployment. In this regard, the transition to a digital economy must be orderly and linked to solving current issues such as 'excessive self-employment' and 'manufacturing sector restructuring.'

The Korean economy has so far defended against growth rate declines by compensating for weak domestic demand with exports, but after the COVID-19 shock, even the fuel efficiency of the export engine is rapidly declining. The existing policy approach of simply expanding and reproducing previous policies will never prevent new crises. It is time for a major shift in economic policy to revive the flames of private consumption and corporate investment, which are the pillars of domestic demand.

Song Doohan, Head of NH Financial Research Institute, NH Nonghyup Financial Group

This content was produced with the assistance of AI translation services.