The Ministry of Strategy and Finance revised down key economic indicators last week when it announced its plan for the economy in the second half of this year.
The ministry slashed its growth outlook for 2015 to 3.1 percent from an earlier projection of 3.8 percent, citing slumping exports and the negative impact of the Middle East respiratory syndrome outbreak on consumer spending and business sentiment. On employment, the ministry forecast that about 400,000 new jobs would be created this year, down from its earlier estimate of 450,000. It also expected the country’s consumer prices to grow just 0.7 percent on-year in 2015, down from the 2 percent previously predicted.
The ministry’s latest growth outlook is on par with a forecast made by the Bank of Korea in April. Earlier this month, the central bank cut its key interest rate to a record low of 1.5 percent to help boost the economy, with domestic consumption hit hard by the MERS outbreak.
The ministry said the outbreak of the deadly virus could pare up to 0.3 percentage points off annual economic growth.
The slump in exports, which is attributed mainly to slowing global demand and a weak yen and euro, poses another critical downside risk to Asia’s fourth-largest economy. Korea’s exports fell 10.9 percent from a year earlier in May, shrinking for the fifth consecutive month.
To boost the troubled economy, the ministry said it would push for a 15 trillion won ($13.3 billion) stimulus package by drawing up a supplementary budget and utilizing various state-run funds. The exact size of the extra budget will be determined after more consultation with the ruling Saenuri Party before it is submitted to the National Assembly for approval. The proposed supplementary budget needs to be implemented as early as possible to maximize its effect.
Finance Minister Choi Kyung-hwan, who concurrently serves as deputy prime minister for economic affairs, warned that growth could come in below 3 percent this year without support from the extra spending. Korea’s economic growth rate, which remained at 2.3 percent in 2012, rose slightly to 2.9 percent in 2013 and 3.3 percent last year.
But it may be naive to hope that a supplementary budget and interest rate cuts will boost consumer spending and corporate investment.
In a reflection of growing worries over an uncertain future, household consumption increased a meager 0.6 percent in the first quarter, while the real gross national income rose more than 4 percent over the cited period. Low interest rates have helped channel money into stock and real estate markets, doing little to boost consumer spending.
Companies can hardly be expected to expand investment without labor market reforms and drastic deregulation in the service sector. It will also be difficult to create more new jobs when corporate investment remains sluggish.
Hence, all policy means should be used to encourage entrepreneurs to invest more aggressively and consumers to spend more readily.
The second-half economic management plan unveiled last week should have touched on them in earnest. It also fell short of putting forward concrete measures to support exporters and increase employment.
The plan reiterated the need to push for reforms in labor, finance, education and the public sector. Efforts should be stepped up to carry forward with the structural reforms, which are crucial to boost the country’s growth potential over the long term.
