4High... The Era of Doom & Gloom

<High Interest Rates, High Inflation, High Wages, High Exchange Rates>

[Asia Economy Jeong Jaehyung, Managing Editor of Economic Finance] The trend of the four highs?high interest rates, high inflation, high wages, and high exchange rates?is expected to continue. Accordingly, economic slowdown is becoming a foregone conclusion. External factors such as the Russia-Ukraine war and the global supply chain restructuring are all deteriorating, deepening the trend of economic slowdown. For the time being, it could be a completely bleak (doom and gloom) era.

Currently, inflation is driven by supply-side factors, but it is not a one-time issue. Problems such as factory shutdowns due to COVID-19 are being resolved, but global supply chain restructuring and pressures for low-carbon and eco-friendly policies will continue to act as inflationary factors.

The phenomenon where rising prices push wages up, and rising wages in turn drive prices higher, has already begun to appear in the United States. In South Korea, consumer prices rose 4.8% in April, and inflation is expected to spread across all essentials such as food, clothing, and housing, with the figures likely to increase further. While wage increase demands were strong only among some successful companies last year and early this year, by the second half of this year, wage increase demands due to inflation will spread. Wage increases will again be reflected in prices.

Central banks have no choice but to raise interest rates to respond to inflation. Although it will be difficult to suppress inflation, interest rates must be raised to break inflationary expectations. The U.S. Federal Reserve (Fed) is expected to take several more big steps (0.5 percentage point rate hikes), and the Bank of Korea will inevitably follow, considering the interest rate differential between Korea and the U.S. For the time being, the Monetary Policy Committee may have to raise rates by 0.25 percentage points each time it meets.

The Bank of Korea’s growth forecast for this year is 3.0%, and a survey of 200 professors of economics and business administration conducted by the Korea Employers Federation shows a forecast of 2.7%. Growth forecasts are expected to decline further.

The problem is not just this year. The low birthrate and aging population are continuing to worsen, and no remarkable technological innovations are visible. Large corporations seem more focused on defense (守城) rather than making large-scale investments. They should have used the recent stock market boom to improve their financial structure and increase investment capacity, but there are criticisms that they pursued only the interests of the owners through affiliate spin-offs and listings.

The new government will soon be inaugurated, but it is uncertain how well it will respond to these internal and external adversities amid a chaotic atmosphere. If it does not accept raising the national debt ratio (45.4% in 2020) further, there is no fiscal room. Interest rates must be raised, and fiscal spending cannot be significantly increased. This will lead to unwanted tightening. In any case, the outlook is bleak.

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