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South Korea’s stock markets, which had been rattled the previous day by fears of a potential U.S. economic slowdown and geopolitical tensions in the Middle East, rebounded, Tuesday, providing relief to investors and policymakers.
The main KOSPI index recovered 3.3 percent to close at 2,522.1, Tuesday, after a sharp drop of 8.77 percent the day before. The secondary Kosdaq also gained 6 percent to finish at 722.87, following an 11.3 percent decline the previous day. The steep losses had prompted authorities to activate circuit breakers for both the KOSPI and Kosdaq, marking the first use of those measures in four years and five months.
With the markets rebounding, the prevailing view is that a recession in the world’s largest economy is not imminent. Financial authorities in Korea moved swiftly on Tuesday to urge calm, emphasizing that the recent decline was confined to the stock market and not reflective of broader economic conditions. They suggested that Seoul should treat this scare as a warning and focu
s on strengthening its economic fundamentals.
Fears of a possible recession and stock sell-offs had already been evident in U.S. markets late the previous week. The situation intensified with the U.S. Labor Department’s announcement on Friday, which revealed that the American economy added just 114,000 jobs in July, marking the second-worst performance in the past 43 months. Additionally, U.S. unemployment rose to 4.3 percent, the highest level in nearly three years. The situation was further compounded by disappointing quarterly earnings from major U.S. tech companies, which even sparked concerns about a potential “AI bubble.”
Finance Minister Choi Byung-mok stressed in a meeting with Bank of Korea Gov. Rhee Chang-yong, Kim Byoung-hwan, Financial Services Commission chairman and others, Tuesday, that the government has policy tools necessary to deal with any contingencies.
In the U.S., there is significant criticism of the Federal Reserve for missing the optimal timing to implement a rate cut, with many o
bservers anticipating a substantial 0.5 percentage point reduction. Some have even called for an earlier, emergency cut. The BOK will likely face pressure to align its policies with the Fed’s moves. However, the central bank faces a challenging dilemma with rising housing prices and increasing household debt. The Korean government also bears some responsibility for delaying the implementation of the second-stage stress-based debt-to-service ratio for loans. The best course of action would be to proceed with the planned implementation in September. Policymakers need to address the real estate and housing market more proactively and move beyond their current complacency.
As the U.S. has re-emerged as Korea’s largest export market, its economic slowdown and skepticism about the artificial intelligence sector could complicate the recovery of Korean semiconductors. Korea Inc. has been struggling post-pandemic, with the economy contracting by 0.2 percent in the second quarter of this year.
The government must act
decisively and address both external and internal factors impacting the economy. One of its most pressing tasks is to manage the heated housing sector. Policymakers, known for their elite backgrounds, need to develop a plan to stabilize housing prices while minimizing negative impacts. Meanwhile, the National Assembly must put an end to the cycle of partisan conflict, where the opposition’s slew of impeachment and special counsel bills are met with filibusters from the ruling party and presidential vetoes. With new leaderships established in both the ruling People Power Party and the main opposition Democratic Party of Korea, bipartisan cooperation is essential to prioritize the nation’s economic stability.
Source: Yonhap News Agency
