[Ask IB]③SG "Korea's Growth Relying on Working Elderly Faces Limits"

O Seok-tae, Economist at Korea SG Securities

O Seok-tae, an economist at Korea SG Securities, is being interviewed on the 12th at D Tower in Jongno-gu, Seoul. Photo by Kang Jin-hyung aymsdream@

"The reason South Korea's growth rate has maintained a certain level so far is largely due to the employment rate of those aged 60 and over, which ranks first among OECD countries. However, with the working-age population (15-64 years old) decreasing by 2% annually and aging intensifying, there are limits to supporting growth."

On the 12th, at the office of Korea SG (Soci?t? G?n?rale) Securities in Jongno-gu, Seoul, economist Oh Seok-tae, when asked whether South Korea can avoid low growth, replied, "We have done all the easy growth possible." He said, "South Korea's potential growth rate practically depends on the employment rate of the elderly population," adding, "If the employment rate of the elderly falls to the current OECD (Organisation for Economic Co-operation and Development) average level, the potential growth rate could drop to -1%."

Economist Oh explained that recent economic growth was driven by the IT industry, which has high labor productivity and grew significantly right after the pandemic, as well as working elderly people. He said it is now time to face concerns similar to those of advanced countries like the UK and France, where growth rates have stagnated. Recently, Lee Chang-yong, Governor of the Bank of Korea, also expressed concerns in an interview with a foreign media outlet that prolonged global high interest rates, aging, and low birth rates could lead to low growth.

Regarding the direction of interest rates, he said, "The period from 2009 to 2019 after the global financial crisis should be considered an exceptional low-interest-rate era," and predicted that the era of low interest rates before the pandemic will not return for the time being.

Specifically about South Korea's monetary policy, he analyzed, "Considering inflation and macro leverage (debt) issues, I think additional rate hikes are necessary, but realistically, it seems they have chosen to maintain high policy rates rather than further hikes."

Below is a Q&A with economist Oh Seok-tae.

O Seok-tae, an economist at Korea SG Securities, is being interviewed on the 12th at D Tower in Jongno-gu, Seoul. Photo by Kang Jin-hyung aymsdream@

- With the recent sharp rise in U.S. Treasury yields, expectations for rate cuts have diminished, and forecasts suggest that the high interest rate environment will last much longer. Should we consider high interest rates as the 'new normal'?

▲ Before the pandemic, the U.S. 10-year Treasury yield hovered around 2%, but I think it will be difficult to return to that level now. In the past, nominal interest rates were lower than the sum of real growth rates and inflation rates. But that is no longer the case. Looking at a broader time series, I believe we are returning to normal.

- What is the reason?

▲ First, central banks no longer buy bonds. After the financial crisis, unconventional monetary policies like Yield Curve Control (YCC) were implemented, and central banks purchased bonds, artificially suppressing interest rates. But now, except for Japan, major central banks have mostly stopped this policy and have even started selling bonds.

Secondly, from an economic fundamentals perspective, inflation rates worldwide have risen. Central banks bought bonds and conducted quantitative easing (QE) due to 'deflation fears.' After the financial crisis, there were concerns that "the world could become Japan." However, now even Japan has inflation rates of 3-4%.

- What do you think is the reason for the prolonged high inflation?

▲ It is the aftermath of policy and behavioral changes caused by the pandemic. During COVID-19, people initially increased goods consumption while being restricted, then shifted to service consumption as social distancing eased. Governments that pumped money into the economy during the pandemic are now tightening to curb inflation, but inflation remains stubborn. It has been almost four years since the COVID-19 virus appeared, and this situation seems to have some inertia beyond base effects.

- Market expectations for a pivot to rate cuts are being delayed.

▲ The U.S. interest rate stance is 'Higher for longer (H4L).' The faster and higher the rate hikes, the more the market expects a quick cut, which is a side effect. So the strategy has shifted to maintaining a moderately high level for a longer period. Metaphorically, it's not 'high-temperature instant sterilization' but 'low-temperature long-term sterilization.' This effect has appeared. I believe the Fed still has room for fine-tuning rates.

- Despite ongoing monetary tightening, the U.S. labor market remains hot. What is the reason?

▲ It means the U.S. economy is still strong. People who lived paycheck to paycheck received significant support during the pandemic. Americans are among the most optimistic consumers globally. The rate of depletion of excess savings in the U.S. is higher than in other countries. Therefore, the inflation impact after the pandemic still remains and shows up in employment figures.

Moreover, fiscal tightening in the U.S. is not progressing well. While monetary tightening policies are in place, the money released during the pandemic also needs to be withdrawn, but this is not happening smoothly. This situation causes the economy to trend upward while pushing interest rates higher.

- What is your view on South Korea's low growth concerns? Projections suggest growth will remain in the low 2% range next year after about 1% this year.

▲ SG Securities projects South Korea's growth rate at 1.1% this year and 2% next year. We believe all the easy growth has been achieved. Although consumption was difficult during the pandemic, export companies in IT and automobile sectors earned a lot. As growth increased, labor productivity also rose. We are now experiencing the aftereffects. With semiconductors underperforming compared to before, tax revenues have decreased, causing fiscal deficits, and with a declining population, relying on domestic demand is difficult. A potential growth rate above 2% would be considered good, but conservatively, we expect the high 1% range. Growth will slow as the population declines. Potential growth rate is expected to continue falling.

- So should we accept low growth as inevitable now?

▲ There have been two main reasons why South Korea's economic growth rate has not fallen: the IT sector with high labor productivity defended the economy right after COVID-19, and the high economic participation rate of those aged 60 and over supported growth. South Korea has had the highest elderly employment rate among OECD countries for over 10 years. This year's data shows it has risen further to 36.2%. The elderly contribute significantly to potential growth. However, as the population ages further with more people in their 70s and 80s, maintaining growth rates will be difficult. The Korean economy is already capital-intensive, so suddenly increasing capital is not easy. Potential growth will be determined by labor productivity and labor input, and how long labor input can be sustained is the key.

- Geopolitics and the international political order are increasingly impacting the economy. Supply chain decoupling and restructuring are underway internationally. Do you think supply chain separation led by the U.S. and Europe can succeed? What impact will it have on South Korea?

▲ In today's world, supply chains cannot be completely separated. The two most contentious areas between China and the U.S. are semiconductors and electric vehicles, and South Korea is involved in both. China is trying to catch up in semiconductor technology, but the U.S. is blocking it. Meanwhile, China has established a base in electric vehicles, while the U.S. defends with Tesla. Geopolitically, South Korea is on the front line of the U.S.-China confrontation.

- China is becoming self-reliant in intermediate goods. It seems South Korea's market share is declining in the global market except for some products. What is your view?

▲ China cannot continue only with low-wage labor industries. It is climbing the technology ladder, so South Korea will inevitably cede some market share. More concerning than intermediate goods or supply chain issues is the shrinking market share of South Korean final consumer goods like automobiles and mobile phones in China. We need to target premium markets competing with Germany's Mercedes-Benz and the U.S.'s iPhone to expand in China. The China ban and talk of a new cold war are reasons not to give up because the Chinese market is too large. No matter how severe U.S.-China conflicts are, Chinese people's love for Apple remains strong. South Korea must also target such premium markets.

- Emerging markets are suffering from continuous U.S. rate hikes. Could this affect the global economy?

▲ Major emerging markets like Brazil, T?rkiye, Mexico, and Indonesia, which we classify as 'emerging markets,' are holding up well because they raised their benchmark rates preemptively. Although prolonged high rates will be challenging, not cutting rates immediately will not suddenly ruin their economies. The problem lies with countries classified as 'frontier markets,' such as Pakistan and Egypt, which are in very difficult situations but are less visible.

- Was Japan's zero interest rate policy effective? When might Japan abolish the zero interest rate policy?

▲ Ultimately, I think Abenomics succeeded. Looking strictly at this year, Japan's real growth rate, nominal growth rate, and inflation rate are all higher than South Korea's. If wage increases of about 2% emerge in next year's spring labor negotiations, it will indicate widespread inflation expectations, and Japan could raise rates around the first half of the year. Currently, monetary policy adjustments are limited to YCC tweaks, but from next year, adjustments to the benchmark interest rate itself will be possible. However, the challenge will be managing the increased national debt interest costs as rates rise.

- What is your outlook for South Korea's benchmark interest rate? When will rate cuts occur?

▲ Considering the interest rate inversion between Korea and the U.S., inflation risks, and household debt issues, South Korea probably needs to raise rates further, but realistically, it is difficult to do so. The Bank of Korea has hinted at possible hikes, but it has been about eight months already. It seems they lack the courage to push the country into a recession to curb inflation. Instead, they appear to have adopted a stance of 'holding steady without cutting.' In a way, South Korea started H4L earlier than the U.S. The timing of rate cuts ultimately depends on a pivot in U.S. monetary policy. Our house view forecasts a recession deep enough for the U.S. to pivot around the second quarter of next year.

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