On Aug 2, concerns about a potential U.S.-driven recession caused a ‘Black Friday’ for Asian stock markets, including South Korea. The KOSPI index fell by 3.65%, and the KOSDAQ dropped by 4.2%, while Japan’s market decreased by 5.81% and Taiwan’s by 4.43%, marking their most significant declines since the early days of the COVID-19 pandemic. These drops were fueled by fears of weakening U.S. manufacturing and domestic demand, alongside Intel’s announcement of significant layoffs, sparking worries that the growth of major tech companies may be slowing.
The impact extends beyond the stock markets. Despite strong exports in sectors such as semiconductors and automobiles, South Korea’s domestic economy has been contracting, shrinking by 0.2% in the second quarter compared to the previous quarter. Housing prices in Seoul have risen for 19 consecutive weeks, with the trend spreading to the metropolitan area, raising concerns about a resurgence of the speculative housing market observed under the previous administration. Additionally, the worsening payment suspension issues faced by e-commerce companies TMON and WeMakePrice pose a threat of widespread bankruptcies among small business owners, further burdening the self-employed sector.
As domestic consumption declines, housing prices surge, and small businesses struggle, South Korea is also facing external financial instability stemming from the U.S. The government’s capacity to respond with fiscal and financial policy tools is limited. The previous Moon Jae-in administration increased the national debt by over 400 trillion won (approximately $293.8 billion), leading to a total national debt of 1,000 trillion won ($734.5 billion). This restricts the current Yoon Suk-yeol administration’s ability to deploy expansive fiscal policies. Normally, in a sluggish domestic demand environment, fiscal stimulus would be considered to stimulate the economy. However, a tax revenue shortfall of more than 10 trillion won compared to the previous year complicates the formulation of a supplementary budget.
Lowering interest rates to stimulate the economy is also constrained by concerns about rising housing prices and household debt. Further rate cuts could exacerbate these issues and, with policy rates already 2 percentage points lower than those in the U.S., might lead to a spike in exchange rates, causing financial instability. This situation presents a complex policy dilemma.
While a perfect solution that simultaneously stimulates growth, controls inflation and housing prices, and reduces household debt is ideal, it is not realistic. However, through close coordination among the presidential office, relevant economic ministries, and the Bank of Korea (BOK), it is possible to achieve policy objectives while minimizing adverse side effects. The current economic leadership faces a significant test and must demonstrate sophisticated crisis management skills to navigate these overlapping challenges.
