Alarming signs about the South Korean economy are popping up everywhere. Inflation is soaring, stock markets tumbling, and the local currency’s value dropping. The growth outlook is turning gloomier while investors across the world are turning jittery as the US Federal Reserve is speculated to hike interest rates at a faster pace. The combination of ominous signs is dreadful enough to spook both policymakers and investors. But being aware of impending economic pitfalls is not enough; decisive and preemptive actions are in order. 

The country’s main bourse Kospi kept sliding this week after plunging by 3.52 per cent Monday. The sharp drop came after the US stock market tanked Friday amid deepening concerns that the Fed may hike its key interest rate by 0.75 percentage points – a “giant step” to tame the increasingly intractable US inflation, which hit a 41-year high of 8.6 per cent in May. But the steep fall of global financial markets cannot be explained by the Fed’s interest rate hike alone. In fact, worries have been mounting about several negative factors, including Russia’s invasion of Ukraine, which worsened the already clogged global supply chain and sent energy prices flying high- er. Some experts argue that liquidity-fuelled financial, real estate and crypto market bubbles are set to burst, as major economies move to tighten their monetary policies. 

The outlook for South Korea’s economy this year is far from encouraging. For instance, Fitch Ratings, a credit appraiser, lowered its 2022 growth outlook for the South Korean economy to 2.4 per cent Wednesday, citing the fallout of the Russia-Ukraine war and the economic slowdown in China, which is South Korea’s biggest trading partner. To calm spooked investors and help stabilize the market, Korean policymakers are declaring their resolve to tackle the challenges. 

“The government needs to take actions to prevent market jitters from sharply rising due to excessive herd behaviour in the FX market and review contingency plans that can be mobilized at any time,” Finance Minister Choo Kyung-ho said. But the road ahead looks bumpier than previously thought. The country’s consumer prices jumped 5.4 per cent on-year in May, the fastest rise in almost 14 years. Given the rising local inflation and the Fed’s rate hikes, the Bank of Korea is also set to additionally raise the rate soon. The Korean central bank already raised the policy rate by a quarter percentage point to 1.75 per cent last month, marking the fifth increase in borrowing costs since August last year. As economists warned, however, rising interest rates too much and too fast could tip the economy into a recession, creating a situation that discourages firms from borrowing money and making new investments, and forces consumers to tighten their purse strings.