The Korea Development Institute slashed a large chunk off of the nation’s 2012 growth outlook earlier in the week ― 1.1 percentage point from 3.6 percent. Such a drastic revision by the nation’s leading state-funded economic research institute should have come as a surprise. But it didn’t. People had undoubtedly expected as much, given that many other think tanks and financial institutions had already lowered the growth outlook sharply.
Instead, quite a few may have wondered if the KDI has lost much of its research and forecast capacity, given that it had to revise the growth outlook so much and in such a short span of time ― just four months. Or they may have wondered if the KDI attempted to curry favor with a growth-first administration by inflating the growth outlook in the first place, as was claimed by its critics when it announced last November that this year’s GDP growth would stand at 3.8 percent.
Either way, the downward revision has great implications for the nation’s economic management, given that the administration relies heavily on the KDI for economic analyses in crafting its key economic policies. In other words, the KDI is putting pressure on the administration not only to cut its official growth projection for this year but to become more moderate in setting the 2013 economic management goals.
The impact of low growth will be most acutely felt in the job market. According to one estimate, a drop of 1.1 percentage point in gross domestic product would mean 80,000 fewer new jobs ― a serious setback for the administration, which has repeatedly promised to give top priority to job creation.
Of course, much of the blame for the nation’s slow growth must go to the severe debt problems of the eurozone, which have dampened the global economic outlook. As a consequence of the deepening fiscal crisis, monthly Korean exports have either been stagnant or on the decline, slowing down Korea’s recovery.
Now the question is whether or not Korea is permanently stuck in a slow-growth mode, like Japan and some other advanced nations. The KDI’s revised growth forecast is even more ominous than it looks: What it says is that growth will slow down to 2.5 percent despite the administration’s commitment to tax cuts, spending increases and other types of fiscal support that will have the effect of spending an additional 13 trillion won this year.
The KDI forecasts 3.4 percent growth for next year. Growth at that rate will still be seen to be moderate, though it is higher than the rate for this year. Moreover, the forecast should be taken with a grain of salt. The think tank will have to revise its growth outlook downward again if the economic conditions fail to improve.
But the problem is that Korea does not have much room for maneuver. A case in point is the Bank of Korea’s monetary policy. The central bank decided to continue to keep its benchmark rate intact at 3 percent, although it was called on to help boost growth by cutting the rate when its Monetary Policy Committee convened earlier this month. It could not afford to cut the rate again this time as it was already low.
As it does not have much to do under these circumstances, the administration will do well to brace for slow growth until the global economy sorts things out. An additional stimulus package will undoubtedly do more harm than good.
