Korea's household debt refinancing crisis due to the US economy's high growth rate of 3.5%, high wages and low unemployment
The U.S. economy maintained high growth of 3.5% last year with high interest rates in the 5% range and low oil prices, and high wages and low unemployment caused a boom for American workers, deflecting predictions of an economic recession at the beginning of the year.
With the surge in prices, Fed economists and professional forecasters predicted at least a short-term economic contraction and a rise in unemployment, but due to ‘debt refinancing’ and ‘low oil prices’, neither has materialized so far and the predictions have turned out to be errors.
The New York Times said, “A strong job market has helped push wages up, allowing many households to weather rising prices without having to cut back much, and years of ultra-low interest rates have given households and businesses a chance to refinance their debt. “It has made us less sensitive to the Fed’s interest rate setting campaign,” he said.
The U.S. economy is now seeking answers as to why inflation has subsided despite the Federal Reserve's failure to slow growth.
The main factor is that supply problems will ease less than expected, gasoline prices will fall in 2023, the eased oil prices will flow to other industries, supply chains will recover, and good prices will not rise quickly and in some cases fall, the NYT pointed out.
Regarding the readjustment of the labor market that achieved stable maintenance of the unemployment rate, the NYT stated that the labor market was readjusted in a different way from before due to a slight economic cooling.
The U.S. labor market went from about 2 jobs per available worker in 2022 to 1.4 in 2023, and wage growth has cooled as employers now face less competition for jobs.
The U.S. labor market adjustment has proceeded much more gently than many had expected, leading economists to err on the side of judgment that it is impossible to cool the situation by cutting jobs without causing a spike in unemployment.
The reason the U.S. maintained a strong job market was because the labor market pushed up wages, allowing many households to withstand rising prices without significantly reducing spending.
After years of ultra-low interest rates, the Federal Reserve and the federal government provided households and businesses with the opportunity to 'debt refinance', making households less sensitive to the Federal Reserve's high interest rate policies.
The U.S. economy grew 3.1% in GDP in the year measured from the end of 2022 to the end of 2023, a healthy increase from less than 1% the year before, faster than the average over the five years before the pandemic.
The U.S. economy grew at an annual rate of 2.5% in 2023 on another measure based on average output for the year.
The risk to the U.S. economy was focused on the ‘increase’ in the number of new applications for unemployment benefits announced on the 25th.
“Consumers are increasingly financing their spending with credit cards and ‘buy now, pay later’ loans, which may be unsustainable, especially if the job market weakens,” the NYT said. “High interest rates are damaging the economy.” “It continues to spread, and developments overseas, from conflicts in the Middle East to the weakening Chinese economy, can have an impact at home,” he said.
“Wages, wealth and employment are higher now than before the pandemic,” President Biden said in a statement on the 25th, hailing the latest data as evidence that his economic policies are working. “This is good news for American families and American workers.” “It is,” he said.
This year, the Korean economy was exposed to a sharp decline in trade with China due to a surge in the 'refinancing crisis' due to the economic risk of household debt originating from the United States and dependence on the United States in restoring the U.S.-led supply chain.
Korea's financial sector household loans last year increased by 10.1 trillion won annually due to the government's economic stimulus, a sharp turnaround from the 8.8 trillion won decrease in 2022.
The sudden turnaround in household lending was caused by a surge in housing mortgage loans of 51.6 trillion won last year in the banking sector alone, and the government appears to have attempted to increase debt by inflating expectations of a U.S. interest rate cut.
Unlike the United States, Korea maintained a lower price index than the United States by excluding self-housing costs from the consumer price index, but last year's economic growth rate only increased by 1.4% compared to the previous year.
On the 11th, Bank of Korea Governor Lee Chang-yong announced that the interest rate would be frozen at 3.5% for the eighth time in a row, saying, "It will not be easy to worry about (interest rate adjustment) for more than six months."
On the 29th, the U.S. Treasury announced that the government bond issuance volume for the first quarter would be $760 billion, down $55 billion from the announcement in October last year, and that the government bond issuance volume expected for the second quarter would be $202 billion. As the prospect of an interest rate freeze becomes more prevalent, Korea and The interest rate gap remained at 1.75%, increasing pressure on the foreign exchange market.
Regarding the possibility of a U.S. economic recession this year, American economists pointed out the exposure to three factors: 'worsening unemployment in the job market', 'expansion of refinancing', and 'impossibility of interest rate cuts if supply chain weakens and high inflation recurs' as a caution against economic optimism.
<US recession exposed as ‘worsening unemployment and weakening refinancing supply’, stimulus for Korean semiconductors ‘impossible’, January 22, 2023>