Hyundai Research Institute "Second Half Korean Economy: Election, 3 Highs, and Polarization Issues"

On the 12th of last month, 50 days before the 8th nationwide local elections, the status board installed at the Seoul Metropolitan Election Commission in Jongno-gu, Seoul, displayed D-50. Photo by Moon Honam munonam@

[Asia Economy Reporter Choi Dae-yeol] The Hyundai Research Institute identified ‘political business cycles,’ the ‘era of three highs (high exchange rates, high inflation, high interest rates),’ and ‘polarization of the livelihood economy’ as key economic issues for the second half of this year. Alongside these, it predicted that dilemmas faced by authorities holding the fiscal policy reins, the tightening moves of the U.S. Federal Reserve (Fed), and supply chain shocks originating from China will also be important topics.

Political business cycles refer to economic fluctuations that may arise after elections in the second half of the year. The ruling government attempts artificial economic stimulus to win elections, and after the elections, adopts tightening policies, causing economic fluctuations closely linked to political events such as elections. The institute explained, "While no clear political business cycle is observed in terms of economic growth rates by presidential election, the cyclical component of the economic trend index often shows a decline after elections."

With exchange rates (weakening of the Korean won), inflation, and interest rates all rising simultaneously, the institute forecasted an expansion of economic uncertainty in the second half, increasing the likelihood of slowflation or stagflation. This is due to ongoing supply chain instability and rising raw material prices caused by Russia’s invasion. The institute analyzed that these ‘triple hardships’ are compounded by high exchange rates amid U.S. tightening policies. Since 2000, both instances of the three-high phenomenon have been followed by economic slowdowns.

The polarization phenomenon within the household sector is also expected to deepen. Currently, there is a widening gap in perceived economic conditions depending on income levels, which is reflected in differing speeds of actual income recovery, and future outlooks are also sharply divided. The institute stated, "The burden of living costs and increased interest expenses will concentrate on vulnerable groups," adding, "The polarization phenomenon is expected to worsen."

Additionally, amid deteriorated fiscal soundness due to COVID-19, the new government’s intention to increase growth-related fiscal spending to raise potential growth rates, and the Fed’s rapid interest rate hikes raising the possibility of a base interest rate inversion between Korea and the U.S., are expected to be important factors determining South Korea’s economic situation in the second half. The prolonged city lockdowns in China also pose a burden. Following its zero-COVID policy, China has tightened lockdown measures recently in Beijing after Shanghai.

The institute emphasized, "Efforts should focus on mitigating the possibility of domestic economic slowdown and managing internal and external economic risks such as accelerated global monetary tightening, prolonged Russia war, and China’s economic slowdown," adding, "Since livelihood economic risks are expected to concentrate on low-income and vulnerable groups, tailored support measures are necessary to prevent worsening polarization."

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