South Korea’s Risky Road Ahead with Trump’s Re-Election Looming
As global inflation continues, the South Korean economy grapples with high interest rates, oil prices, and exchange rates. Furthermore, the U.S.-China power struggle and the reorganization of the global supply chain are important factors in predicting the future of the South Korean economy. Korean export companies are experiencing changes in business strategies and export-import models for economic growth. This article aims to identify the risk factors for next year’s economy and hear possible scenarios through experts.
The possible entry into a recession and the possibility of U.S. President Trump’s re-election are emerging as key issues for 2024. The increase in marginal companies due to prolonged high interest rates is becoming prominent. Trump’s re-election could significantly influence trade policies, major international trade trends, and relations between nations, making it a significant variable for the economy. Market experts agree that if Trump is re-elected next year amid concerns about a global recession, the economy and diplomatic issues could become more complicated. In response, I met with futurist Dr. Choi Yoon Sik to anticipate the risk scenarios the South Korean economy may face in an uncertain future and to explore strategic responses.
Dr. Choi Yoon Sik received his degree from the prestigious Future Studies program at the University of Houston in the U.S. and has served as a board member of the Association of Professional Futurists (APF). He is currently the director of the Asian Future Talents Research Institute.
-There’s a big event next year, the U.S. presidential election. The results are expected to change the international political landscape significantly.
To cut to the chase, there is a high possibility of Trump being re-elected, and companies should prepare for this scenario in advance. If Trump is successful in his re-election, all policies, including the Russia-Ukraine war, Israel-Hamas, and U.S.-China trade disputes, will change. Trump’s policies are fundamentally based on America First.
-What is the basis for your belief that Trump has a high chance of being re-elected?
Firstly, current U.S. polls show Trump leading Biden by more than 4 points. Also, the upcoming U.S. election will likely have a three-way structure for the first time in decades. Robert F. Kennedy Jr., a political heavyweight from the Kennedy family, is known to be running as an independent, and U.S. political experts rate him as a candidate who could take at least 10% of the vote. Although Kennedy is a Democrat, his promises are very conservative, and it’s predicted that he will eat into Trump’s votes. However, since he is ultimately a Democratic vote, it’s expected to be more detrimental to Biden. Also, given the current atmosphere, there is a high likelihood that Kennedy Jr. will complete the race. In this case, Biden is doomed.
-The election results could also influence next year’s U.S. economy.
Indeed. If a recession occurs just before the presidential election, regime change is highly likely. Based on this tendency, if a recession occurs before November next year, the chances of Trump being elected are very high. Additionally, considering Biden’s current diplomatic policy evaluation and approval ratings, Trump is better positioned.
-Are you predicting a recession next year?
Historically, recessions do not occur during periods of interest rate hikes. Recessions typically start after a hiatus of 6 months to a year from the peak of interest rate hikes, when interest rate cuts begin. To be more precise, the U.S. Federal Reserve starts cutting interest rates from the moment it deems a recession. The market is currently predicting an interest rate cut around June next year. If the cut begins, then the recession is expected to officially start from the end of next year to the beginning of the following year.
-Current economic indicators say the U.S. economy is doing very well.
While current U.S. consumer indicators are positive, looking back at past cases, consumer indicators usually remain positive until just before a recession, then plunge as the economy officially enters a recession. This is because consumer indicators are closely related to human consumption characteristics. Over the past 100 years, normal indicators such as unemployment rate, inflation, and GDP were announced with an 80-90% probability just before entering a full recession.
-Returning to next year’s U.S. election, assuming Trump is re-elected, what do you expect will change?
The Russia-Ukraine war is still ongoing, and Trump is likely to favor Russia. Also, policies towards Middle Eastern countries are expected to change. He will likely make moves to restore relations with Saudi Arabia and stand by Israel to pressure Iran. Particularly, unlike Biden, his policy towards China is expected to change towards stifling China.
-The outlook for the Chinese economy next year is not bright. Despite stimulus measures to alleviate deflation concerns, the effects seem minimal. As a result, the domestic economy is expected to struggle to escape the influence of the Chinese economic downturn.
China’s economic stimulus measures actually began around 2014-2015. To sum up the current situation, it appears that China has fallen into a liquidity trap. Even during the U.S.’s tightening period, China continued to pump money into the economy. They lowered the reserve ratio interest rates and tried to increase demand through government fiscal deficits, barely maintaining a growth rate in the 5% range. Therefore, I think it’s difficult for the Chinese government to reach its target of 8%. Hence, there’s nothing to gain for our country by looking at the Chinese economy.
Significantly, the loss of competitiveness within China can be said to be a more fundamental reason. The problem is that apart from semiconductors, where our country has an advantage, everything else is going to Chinese companies.
-The exchange rate has been soaring since the beginning of this year and is currently stabilizing and declining. As a result, there are also expectations of price stability and improvement in the trade balance. How do you evaluate this?
The decline in import prices can be explained from two perspectives: it occurs when the global supply chain is stable, productivity improves, and the economy enters a boom, or it occurs in the process of going into a recession. The current decline in import prices is part of the phenomenon that occurs in the process of going into a recession as global inflation returns to normal. Therefore, the optimistic economic logic of next year’s trade surplus forecast and import price decline do not match.
-The sharp increase in marginal companies unable to cover interest costs with operating profits due to prolonged high interest rates is pointed out as a factor of economic instability.
Almost 40-45% of domestic marginal companies are listed, which is a remarkably rapid increase. In a normal economic pattern, they would naturally be cleared out during a recession. Still, the government’s fiscal and monetary policies, due to the unexpected COVID-19 pandemic, missed the restructuring period and accumulated. This is a serious problem now, and the shock will be even greater in the upcoming recession.
-There are many views that the movement of de-risking, which has recently become a hot issue, will instead hurt the Korean economy.
Until now, China needed a lot from our country, so our exports to China had a high proportion. However, China has now grown into a competitor. The problem is that the speed of our market share decline is faster than the expansion speed of the market.
-Is there a breakthrough?
The Korean economy should not look for a breakthrough in China in the future. We need to pioneer other markets and increase our market share. While it may be challenging to find a country that can immediately replace China, given its huge market, the good news is that we can expect benefits from the Indian market, which is in the process of economic growth with an increasing productive population, similar to China in the past. We should not just look at the immediate effects. We need to diversify our markets with a view to 10 to 20 years in the future.
I see a high probability of entering a recession next year, and I expect the period of actual economic downturn to continue the year after. Therefore, I believe the period when we hit the bottom of the natural economic cycle and enter a boom will be around 2026. Consequently, we must prepare different response strategies for next year and 2026.
Next year, we need to prepare for the recession phase approaching the technical rebound phase, and in 2025, we need to prepare for the actual economic recession. After the economy hits the bottom and starts to rise, we need to prepare for intense competition in global future industries and other areas and strategically plan for the next three years.
By. Park Jung Sun