As Donald Trump tosses grenades at global markets, Asia’s trade-reliant economies are taking the biggest blows. China is slowing fast. Japanese wages just fell a fifth straight month. Singapore’s exports are plunging by double digits. Indonesia is slashing rates.
But the most ominous events of all may be taking place in Seoul.
With its sizable, open economy, South Korea often provides an early warning of sudden shifts in global demand. And right now, its lights are flashing red, signifying problems its neighbors need to attend to but also revealing homegrown troubles President Moon Jae-in must sort out.
Until last week, it seemed plausible to conclude Asia’s fourth-largest economy was in “proceed with caution” mode. Things changed on July 18, when the Bank of Korea unexpectedly cut its benchmark borrowing rate for the first time since 2016.
It was as close to an admission of near-panic as monetary authorities give these days. The sober way to read the 25 basis-point cut to 1.5% is that Governor Lee Ju-yeol is joining a growing number of central bankers shoring up their economies. Even officials in Australia, which has not had a recession in over 25 years, are ramping up monetary stimulus.
Seoul’s warning signal matters because Korea sits at the nexus of three major risks to world growth: the fallout from U.S. tariffs, the depths of China’s slowdown and squabbling among Asian neighbors.
The first two are connected, but pose different challenges for Lee’s team and President Moon’s administration.
A key part of how U.S. President Donald Trump operates his economic policy is keeping foes and allies alike off balance. Mission accomplished: Asia does not know whether Trump will call a truce on Chinese tariffs or announce new ones, nor does Korea’s auto sector have any clue whether Trump’s threatened 25% levy on imports of cars and parts is a bluff or soon to hit showrooms.
Trump’s import levies just resulted in the slowest Chinese growth in 27 years — annualized output of 6.2% in the second quarter. The question, though, is whether President Xi Jinping can overcome the diminishing returns of China’s policies.
The last 10 years of aggressive credit growth and borrowing have already left China with 65 million empty apartments. What happens if Beijing can no longer stimulate its economy with new construction projects? Korean exports — 25% of which go to China — will let us know.
The third question involves intensifying tensions with Japan, which Lee said “will have considerable effects on our economy.” The reference here is to Tokyo’s jab earlier this month at Korean chipmakers, in retaliation for recent Seoul court rulings against Japanese companies for Korean wartime laborers during World War II.
The restrictions Prime Minister Shinzo Abe imposed on exports of semiconductor materials to Korea is partly why the BOK cut its 2019 growth forecast to 2.2% from 2.5% — and slashed its inflation projection to a Japan-like 0.7%.
Moon is under public pressure to retaliate. But Tokyo and Seoul indulging in disagreements stemming from World War II is “a lose-lose proposition,” says economist Taimur Baig of DBS Group Research. It is also the last thing Samsung Electronics, by far Korea’s most vital company, needs.
Or the rest of Asia, for that matter. As much as the region’s leaders wax poetic about regional brotherhood, Asia tends to compete more than it cooperates. Might the Tokyo versus Seoul drama foreshadow unilateralism elsewhere? The odds of a race to the bottom on currencies are rising as Trump pressures the U.S. Federal Reserve to slash rates and weaken the dollar.
All this leaves Moon looking as a dismal second half of 2019. An ominous external sector is colliding with domestic fissures related to his botched reform efforts since taking office in May 2017. The most immediate flashpoint: massive strikes over Moon delaying minimum wage hikes.
Moon won a resounding mandate pledging to be the “jobs president” in a nation plagued by 10%-plus youth unemployment. The cornerstone of his plan was raising minimum hourly pay to 10,000 won ($8.53).
The first two steps in that direction — 16%, then 11% — have already taken effect. Earlier this month, though, Seoul announced a paltry 2.9% boost to 8,590 won for 2020.
That had the Korean Confederation of Trade Unions, armed with more than 650,000 members, pushing back. The KCTU has threatened to strike until Moon makes good on the “income-led growth” strategy that powered him to victory 26 months ago.
Moon is paying the price for being slow to drive the broader structural reform needed to raise living standards. Employers argue that the economy is not buoyant enough to support steady wage bumps. We are not talking about conglomerates like Samsung, Hyundai, LG or SK, but smaller, often street-level operations.
These restaurants, convenience stores and local shops want help via tax incentives or faster-growing gross domestic product to cope with rising labor costs.
So far, Moon has failed to “democratize” growth. That means wresting power away from family-owned conglomerates. Moon’s predecessor, Park Geun-hye, also promised to curb monopolistic behavior and create space for a vibrant startup scene that generates jobs and wealth. Instead, she coddled the chaebols. Park’s 2013-17 presidency ended in impeachment and a 25-year prison sentence for bribery and abuse of power.
Moon excited voters with talk of giving “trickle-up growth” a try, but instead he pivoted to seeking peace with North Korea at the expense of economic retooling. Now Koreans are paying the price as a trade war heads their way.
At a minimum, Moon must break the logjam over a $5.8 billion supplementary budget. His economy needs the support and fast. Endorsed by Moon’s cabinet in April, the bill is stalled in parliament amid squabbling. Even once enacted, lawmakers will probably have to toss even more cash at flagging growth.
Bond traders are already ahead of the BOK. On Friday, yields on three-year government debt dropped to 1.32%. That is a clear signal punters see Lee easing again. The next policy meeting is August 30.
But in a world of near-zero rates, the BOK risks the monetary equivalent of pouring a few glasses of water into an already overflowing lake. And since Korea’s record $1.3 trillion of household debt is, in Lee’s words, “very high,” fiscal loosening may be safer than bigger rate cuts.
It is even more important, though, that Moon get on with deregulatory steps to support small and medium size companies. By cutting red tape and offering tax incentives for the lower end of the corporate food chain, Moon can create greater dynamism from the ground up — and perhaps stop Korea flashing red while the rest of the region struggles.