Economic Risks Loom Larger After Election

Economic risks loom larger after the election

The local government leaders elected Wednesday face difficult challenges. The same is true for the central government, which postponed tough decisions until after the vote. Korea faces the "three highs" of inflation, exchange rates and interest rates, while stock market volatility and housing market risks are also growing. None of these issues can be resolved easily.

Inflation remains a major concern. Consumer prices rose 3.1 percent last month, the fastest increase in two years and two months. The government has spent heavily to suppress fuel prices through a petroleum price cap policy. Without that measure, inflation likely would have been even higher.

The policy's side effects are becoming clearer. Overseas package tour prices rose 26.3 percent last month, reflecting broader increases in travel-related costs. This suggests the policy weakened consumers' sensitivity to high oil prices and encouraged greater fuel consumption, a consequence critics had warned about.

The won remains in the 1,500-per-dollar range. A weak currency does not necessarily signal a crisis, but it reflects the broader condition of the economy. It also raises import costs, increasing production expenses for companies that rely on foreign raw materials and adding pressure to domestic prices.

Interest rates present another challenge. The Bank of Korea strongly signaled a policy rate increase in July. The upper end of five-year fixed mortgage rates at commercial banks has already climbed above 7 percent. Higher rates increase debt-servicing burdens and reduce household spending.

The stock market also requires caution. Although the KOSPI has approached the 9,000-point level, gains have been concentrated in semiconductor-related shares and volatility has increased.

Housing risks are equally serious. Seoul apartment prices continue to rise and the rental market remains unstable. Policymakers should prepare for the possibility that profits from soaring semiconductor stocks and large performance bonuses could flow into housing.

Recent housing pension data highlight this trend. Between January and April, 927 people terminated their reverse mortgage contracts, up 38 percent from a year earlier. The increase suggests many homeowners expect housing prices to rise further.

The combination of a semiconductor boom, a weak currency and elevated inflation is likely to intensify inflationary pressure.

Candidates who campaigned on cash-based welfare measures such as local currency programs should recognize these realities and abandon policies that could worsen inflation. The central government should also avoid relying on strong tax revenues to expand spending and instead focus on structural reforms and long-term investments that can strengthen Korea's economic fundamentals.