The Korean economy is still growing like a weed. However, that’s not necessarily all good news.
- The South Korean economy grew 7.1% in the second quarter 2010, the highest rate of all OECD countries. Thus, the IMF has raised Korea’s growth estimates for fiscal year end 2010 to 6.1% from the previous estimate of 5.75%.
- The International Monetary Fund says Korea’s ability to service (i.e. pay off) their debt hit a near three year high in the 2nd quarter. Thus, the IMF says that South Korea has the “best fiscal soundness” in the OECD.
- Most of the big Korean companies are doing well. The KOSPI (“Korea Composite Stock Price Index”) is booming and hits a new 27 month high.
- Unemployment in South Korea continues to be very low.
- This is not good in my opinion, but the BOK (“Bank of Korea”) did not raise interest rates as expected. The BOK, as a central bank, is theoretically suppose to be independent of the government, but the government may have more say so in monetary policy than is prudent. The IMF sent a strong recommendation to the Korean government to cut it out. Methinks that the LMB administration is, for better or for worse, hell-bent on meeting their campaign goal of 7% GDP growth (even if it is only for one year or a couple of quarters).
- A macroeconomic byproduct of too much growth is inflation, and it is rearing its ugly head in Korea. What is known as the “Engel’s coefficient,” the ratio of household incomes to food purchases, is the highest in 9 years, meaning that Koreans are paying more to put food on the table then they have in almost a decade. High inflation will eventually always kill economic growth.
- Korea’s real estate boom is slowing. People are retracting and buying less property and “delevering,” which is just a technical way of saying that people are hunkering down and paying off their debt and not accumulating more debt.
- The BOK is likely playing around with the won and manipulating its value. Of course, they are doing so to keep it low, or at least slowing natural pressure for its appreciation. Clearly, a lower value won makes Korean exports cheaper and increases their demand. Japan, another export driven economy, is following suit.
- Korea’s exposure to the global economy rises. Although it is the 8th largest exporter in the world, this only makes the economy more susceptible to more global economic slowdown.
- So much for LMB’s “Fair Society.” The income divide continues to worsen.
It appears the Korean government has decided that the traditional stand-by of growing via exports is how they are going to get through the Great Recession. However, with inflation rising noticeably, this will dampen domestic demand and may wash out at least some gains from increased export demand. It’s a fine line the Korean government and the BOK is walking and I’m not a big fan of it. I’d guess that the Korean government has “doubled down” on the belief that there won’t be a double dip recession. However, if there is a double dip recession, then the Korean economy, given its exposure to exports and possible weakening domestic demand, will be caught with its pants down. This is probably why Goldman Sachs is just lukewarm on the Korean economy regardless of whatever glowing things the IMF is saying.
Overall, the Korean economy is booming, but it helps the biggest companies the most and it’s not the highest quality economic growth. Plus, it’s not exactly evenly distributed among the general Korean population.
UPDATE: Via specific request by Wedge. The ugly: