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The leading economic index declined since before the coronavirus
Real estate and financial systems could collapse
To predict, you must look at the economic trends of emerging countries.
The stock and real estate markets have recently hit an all-time high side by side. Listed companies hit all-time highs and apartments worth more than 1 billion won appear one after another on the outskirts of Gyeonggi-do or in local cities.
However, the prospects for economic experts next year are dark. At the Hankyung Millennial Forum end-of-year party, which was held on the 3rd, directors of state research institutes such as the Korea Development Institute (KDI), the Institute for Foreign Economic Policy (KIEP) and the Institute of Korea finances agreed that “economic recovery will be slower than expected.”
I think there was a time when the gap between the asset market and the experts’ perspectives widened a lot. What is the reason for this pessimistic outlook? Choi Yoon-sik, who studied futurism in the United States, systematically analyzed various risks in the Korean and global economy. This is summarized in ‘Big change, future scenarios after Corona 19’, which he published in July this year.
With Choi’s consent, I summarized the content of the book in a question and answer format.
“The economic crisis is the foreseen future”
▷ The book predicted that the economic crisis could start next year.
“The restructuring of companies will begin in earnest from next year. There are already places that receive restructuring and financing support within the 30 largest groups such as Doosan Group and Kumho Group. This is not the end. After the On fire, companies with fringe companies and start-ups will start. The restructuring will begin in earnest, focusing on business and self-employment. “
▷ This is an unexpected analysis considering the recent stock market boom and relatively strong corporate performance despite the effects of a new coronavirus infection (Corona 19).
“With the exception of a small number of large corporations, most Korean companies have already experienced a period of stagnation 7 to 8 years ago. According to an analysis by Alix Partner, which assesses corporate insolvency, the proportion of zombie companies in Korea in the fourth quarter of 2014 was from 11% to 2% in 2016. It rose to 15% in the quarter, at the same time to 5% in the United States, 2% in Japan and 7% in Europe and Africa.
The leading OECD economic index also deteriorated to a similar level to Europe at the time of the financial crisis in Korea, just before the outbreak of Corona 19. It began to decline in June 2017, fell below the average of the OECD in early 2018 and entered a period of full contraction in July of that year. The period of decline is also the longest in history.
The business confidence index fell earlier and started to decline in 2010. In 2014, it fell to the lowest level among 35 OECD countries. The buyer management index of the Korean manufacturing industry also started to decline in 2014 and continued to decline until the Corona 19 outbreak. “
▷ The semiconductor economy is reviving recently and exports of other items, such as electric vehicle batteries, are also strong.
“Except for 2017-2018, when the semiconductor boom triggered an optical illusion, exports to Korea barely increased. September 2019 figures were similar to late 2010. 2019 lows are no different from highs. July 2008 “.
Korea’s gross domestic product (GDP) increased from $ 1.94 trillion in 2010 to $ 1.72 trillion in 2018, while real export volume fell. Personally, I estimate that exports to Korea fell back to 10 years ago.
Even if the economy recovers after Corona 19, many countries will strengthen protectionism to restore their economy. While the search for Chinese companies is also intensifying, exports to Korea will be difficult to escape from the same situation as before for at least three to four years.
This is already seen as a rapid decline in the growth rate. It took 34 years for the US economic growth rate to drop from 5% to 2%. Germany took 27 years and Japan 25 years.
But Korea took only 7 years. Here, the time it took to drop to the 1% level was 4 years in Japan and 1 year in Korea. The United States and Germany maintained a growth rate of 2% until Corona 19. “
▷ Are you saying that before Corona 19, the Korean economy would stagnate due to structural problems?
“Yes. Regardless of how COVID-19 is treated, there is a high possibility that such a problem will become a reality in Korea. However, the severity and duration of the crisis will only be determined by the magnitude of the impact and damage caused. by Corona 19 “.
Korea’s economy could be horribly deteriorated if it receives an additional impact from the second coronavirus pandemic, which is becoming a reality. Even if Corona 19 is retired next year, it is difficult for Korean manufacturing to recover. After all, restructuring is a fixed future.
Interest rates will inevitably rise if the global economic recession drags on amid significant corporate debt or if the financial crisis hits Korea. At this point, many companies will go out of business. “
“We must be aware of a possible crisis in emerging countries”
▷ If companies go bankrupt and interest rates rise, the family economy will also be greatly affected.
“There will be an impact from the huge household debt tied to the real estate sector, which is bigger and riskier than restructuring for companies.
Of course, if government-driven home debt reduction and a soft landing in the housing market are achieved, the financial system may not collapse. Still, low growth is hard to avoid in the long run.
The problem is when the government, which is afraid of bursting the bubble, moves towards increasing household debt. If they choose to drop the bombs on the next government that brings the crisis into reality, the point of collapse could extend, but the worst could happen.
When forced deleveraging occurs due to external shocks, the financial system will collapse. The second financial crisis hits the Korean economy. “
▷ There is no law that a crisis will come just because the conditions are met. If there is a trigger to ignite the crisis.
“The most important sign of the future that I personally see is the timing and scale of the financial and currency crisis in emerging economies.
According to figures from the International Finance Association in April this year, a total of $ 22 billion in funding is expected to come out of 58 emerging countries excluding China in one year in 2020. In March alone, $ 83 billion escaped from emerging countries. It was four times greater than the financial crisis of 2008.
As foreign exchange reserves decline, the burden of dollar-denominated debt that emerging countries must pay has increased. Even in the effects of corona and vaccine development, these countries are likely to be marginalized for some time.
Meanwhile, when the Fed begins to adjust due to inflation or the falling value of the dollar, many countries face financial and currency crises. “
▷ If you are listening to the big picture, it seems that even now, you will have to ditch stocks and real estate and convert them to cash.
“Not necessarily. The recent stock market is more likely to be the result of a major shift in investment flows rather than a simple bubble or temporary phenomenon. A wide range of equity investments can become a mid-range trend. long-term rather than temporary.
The main reason is that real estate prices have already risen to the highest level and the middle class in general is not in a situation where it can make purchases. If the economic recession overlaps with Corona 19, the economic power of the middle class will decline for 2 to 4 years.
Meanwhile, the investment appeal of global stock markets, including the US and China, is expected to remain high for the next three to four years, up to 10 years. “
Although the expected crisis is not realizing
The rise of zombie companies and the reinforcement of protectionism, mentioned by Mr. Choi, are also the crisis factors in the Korean economy discussed by experts at the Hankyung Millennial Forum New Year’s Eve party. It is recommended to read Choi’s book and the Millennial Forum related article on the 3rd.
There is a saying that “the expected crisis is not realizing.” This means that economic actors who anticipate the factors that could lead to the crisis respond in advance and do not lead to a real crisis.
However, now that the outlook for the post-Corona economy is becoming more important than ever, it is necessary to thoroughly examine the basis of the pessimistic outlook.
Furthermore, the long-term decline in the main economic and trade indices that Mr. Choi pointed to as the basis of the crisis is due to structural problems in the Korean economy itself. It is not a crisis of a nature that can be prevented by waiting.
However, the possibility of a crisis may have been exaggerated by overemphasizing certain factors. This part seems to be the part that each person will judge through Choi’s book.
Reporter Noh Gyeong-mok [email protected]
