Local economic research institutes have recently suggested gloomier outlooks for next year’s growth of Korea’s economy than the target set by the government.
The Korea Development Institute, a major state-run think tank, last week cut its growth projection for 2015 from 3.8 percent to 3.5 percent, warning even this reduced goal might not be reached due to growing downside risks. The average forecast made by 17 research institutes here over the past month projected Asia’s fourth-largest economy to expand by 3.7 percent next year.
These estimates are lower than the 2015 growth target set by the government at 4 percent, which many experts view as too optimistic under current economic conditions.
The country’s economic growth rate has remained below 4 percent since 2011, with a KDI report released last week estimating this year’s performance at 3.4 percent, down from 3.7 percent it suggested in May.
The institute noted that sluggish domestic spending and slumping exports would continue to hamper the full recovery of the economy next year.
Policymakers and private-sector economists expressed concern that Korea’s economy is facing growing risks from a depreciating yen, an economic slowdown in China and the eurozone and the impact of the expected hike in U.S. interest rates after years of monetary easing.
A more serious problem facing Korea’s economy may be that domestic spending continues to remain anemic. Especially households are tightening their purse strings as their earnings have stagnated and economic uncertainties have deepened. They are even cutting spending on educating children, which they tend to reduce after saving all other living costs.
As measures to help reinvigorate the economy, the KDI report recommended that the government maintain its expansionary fiscal policy for the time being and prevent household debt from further increasing. Over the past months, the economic team led by Finance Minister Choi Kyung-hwan has pursued policies largely in keeping with these suggestions.
It is right for Choi to try to boost consumer spending by funneling corporate profits into households. But these efforts, including the introduction of taxes on piled-up cash reserves of big businesses, have not yet produced tangible results.
More effective and pertinent policies should be implemented to enhance private spending.
It is necessary to induce more affluent households to spend more. A record-breaking 30 trillion won ($27 billion) was deposited last week in pre-orders for shares of a Samsung Group affiliate, which goes public this week. This may suggest there is more room for expanding consumption spending by wealthy individuals.
In the long run, however, it is essential to help working-class families earn more. A paper released last week by a local university professor showed that the lowest 40 percent of earners in the country accounted for only 2.05 percent of the total income in 2010, with the highest 10 percent taking 48.05 percent. If left unaddressed, this widening income inequality will become a major stumbling block to reinvigorating the economy and enhancing its growth potential.
