“Circuit Breaker to Trigger Downside Risks to Economic Growth and Fiscal Spending”

"Small Interest Rate Cuts and Continued Dollar Strength"

On the 5th, a circuit breaker (CB) that temporarily halted trading on the KOSPI and KOSDAQ was triggered for the first time in 4 years and 5 months, and an analysis has emerged suggesting that this could have a negative impact on future economic growth.

Jinwook Kim, Chief Economist at Citi, stated this on the 6th in "The Korean Economy: The Macroeconomic Response History to Stock Market Circuit Breakers." He analyzed circuit breakers in the Korean stock market since 2000 and concluded that such shocks create downside risks to economic growth within three months. In particular, he noted that there is a negative impact on facility investment and imports during the three months following a circuit breaker. However, there tends to be a recovery between four and six months. Exports showed a trend of growing faster compared to other variables. To mitigate the negative impact on domestic demand, government consumption (public institutions providing services and spending taxes) also tends to expand rapidly.

Economist Kim also argued that the decline in domestic gasoline prices could pose a risk of disinflation. Disinflation refers to economic adjustment policies centered on fiscal and monetary tightening to overcome inflation. The shock in the stock market was accompanied by a drop in domestic retail gasoline prices, which in turn showed a tendency to ease the consumer price index growth rate for three months. However, domestic gasoline prices showed a rising trend again within six months.

Additionally, the Bank of Korea tended to slightly lower the base interest rate between three and six months after a circuit breaker. This is interpreted as a measure to address downside risks to economic growth and stabilize inflation. In the financial market, a strengthening of the dollar was observed following the circuit breaker.

Meanwhile, Economist Kim also analyzed that there is limited fiscal and monetary policy capacity to stimulate domestic demand in the second half of this year. He cited the slowdown in import growth compared to fiscal spending, which limits the resources available for use in the second half of the year, and the possibility that if mortgage loan interest rates remain below 4.2%, sustaining the strength of apartment prices in Seoul, the Bank of Korea may delay lowering the base interest rate.

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