Growth target above 3% beyond reach

Finance Minister Yoo Il-ho said last week it would be possible to reach the government-set growth target of 3.1 percent this year.

“The Korean economy will be able to post 3 percent level growth this year,” said Yoo, trumpeting the government’s efforts to boost investment, exports and structural reforms.

But his forecast seems alienated from predictions by most economic institutes at home and abroad, which have revised down their growth outlook for Asia’s fourth-largest economy struggling with declining exports and slumping domestic demand.

A day after the finance minister adhered to the official growth goal, two local research institutes published reports that painted a gloomier picture of the Korean economy.

The Korea Institute of Finance saw the country’s economy would grow by 2.6 percent this year, down from its earlier prediction of 3 percent expansion. The LG Economic Research Institute lowered its forecast from 2.5 percent to 2.4 percent. On Sunday, the Hyundai Research Institute cut its outlook from 2.8 percent to 2.5 percent.

Earlier last week, the International Monetary Fund slashed its forecast for Korea’s growth this year to 2.7 percent, down from the 3.2 percent it predicted in October.

The Bank of Korea is also expected to join the downward revision Tuesday, when it is scheduled to announce its latest growth outlook. In January, the central bank predicted the Korean economy would expand by 3 percent this year.

Economists here say Yoo, who also serves as deputy prime minister for economic affairs, is likely to follow in the steps of his predecessor Choi Kyung-hwan. Choi insisted on keeping the 2015 growth target in the 3 percent range only to concede at year-end that the goal was beyond reach. The Korean economy expanded by 2.6 percent last year.

Government policymakers seem to regard a target above 3 percent as symbolic of their resolve not to allow the economy to become trapped in a low-growth rut.

Many economists note Yoo is set to face tougher work to prop up growth than his predecessor, as most short-term stimulus measures have been used up.

“The growth in consumer spending is expected to slow down in the latter half of the year as the effect of policy measures wears off, while the increase in facility investment will likely remain at a level below that of last year amid a continued slump in exports,” the KIF said in its report.

Yoo has recently expressed his willingness to put into practice fiscal stimulus, raising the possibility of drawing up a supplementary budget if economic conditions would become worse than expected. The top economic policymaker is also likely to come under growing pressure to boost economic vitality from the ruling Saenuri Party, which suffered a crushing defeat in last week’s general election, in the run-up to the presidential vote set for late next year.

With opposition parties dominating the incoming parliament, however, the government will find it difficult to get legislative backing for stimulus measures.

It will be impossible to carry out an election pledge by the ruling party to drastically ease monetary policy, given negative response from opposition parties. The Ministry of Strategy and Finance may also have difficulties getting parliamentary approval for a possible supplementary budget, which opposition lawmakers argue would hurt financial soundness and increase national debt.

Many economists agree a broad range of fiscal and monetary measures are needed to prevent consumer and business sentiments from being further dampened to deepen the slump in investment, spending and employment.

Critics, however, question the wisdom of sticking to a growth target that is realistically unachievable and mobilizing policy tools to reach it.

“Fiscal stimulus, even if taken as envisioned by the government, is nothing but a short-term prescription,” said Choe Byeong-ho, professor of economics at Pusan National University, who heads the Korean Association of Public Finance. Choe said efforts should be stepped up to push for the restructuring of industries, which he said would hold the key to the continuous advancement of the Korean economy.

Lee Geun-tae, a researcher at the LGERI, said repeated downward revisions over the past years reflected the country’s sagging growth potential.

“The focus of future policy should be put on enhancing growth potential rather than short-term stimulus,” he said, cautioning that expanding spending to achieve the 3 percent range growth not backed by economic fundamentals would exacerbate negative effects on the economy.

By Kim Kyung-ho (khkim@heraldcorp.com)