Enhancing consumer goods, service sectors needed to boost growth

It seems only a matter of time for Korea’s economic policymakers to revise down the country’s growth target for this year below 3 percent. This downward revision may come next month when the Ministry of Strategy and Finance announces directions of policies to be pursued in the latter half of the year.

The Organization for Economic Cooperation and Development this week cut its 2016 growth forecast for Korea to 2.7 percent from 3.1 percent, citing sluggish global trade and a slowdown in China. It was added to a list of institutes at home and abroad that have lowered their earlier expectations of this year’s performance by Asia’s fourth-largest economy.

A recent report from the Korea Development Institute, a state-run think tank, noted that the country’s economy remained sluggish mainly because a deepening slump in exports resulted in weakening manufacturing activities and reducing facilities investment. Output in manufacturing and mining industries declined by 1.5 percent from a year earlier in March, with facilities investment showing a 7.8 percent contraction.

Korea’s manufacturing sector has been undergoing a longer period of ebb than in the aftermath of the 1998 foreign exchange crisis and the 2008 global financial crisis.

According to a report released by Hyundai Research Institute last week, the country’s manufacturing production managed to reach its precrisis level in three to four quarters in the past. But the latest downturn has continued for six consecutive quarters since the October-December period of 2014.

“The difficulties currently faced by Korean manufacturers stem from a prolonged slump in demand,” said Joo Won, a researcher at HRI.

Large manufacturing exporters, which had driven the country’s growth until years ago, are struggling with decreasing orders as global trade and investment remain stalled.

A recent analysis by the Bank of Korea showed falling exports pushed down the country’s growth in the first three months of the year by 0.8 percentage points. Korea is set to see its outbound shipments decreasing for 17 straight months in May.

Economic policymakers here are pushing to reinvigorate growth momentum by coupling corporate restructuring, which is putting its initial focus on shipbuilders, with nurturing next generation industries. An argument that should draw their attention is that efforts should be stepped up to shift the country’s industrial structure to be centered on consumer goods and service industries.

According to U.N. data, export-driven economies grew faster than those reliant on domestic demand for decades through 2007. Since 2008, however, the pace of growth has been reversed between the two groups.

Another KDI report published early this month calculated that the portion of global investment in the world’s gross demand fell by 1.7 percentage points for 2007-14, while those of private consumption and fiscal spending each gained 0.91 and 0.82 percentage points, respectively, over the cited period.

The report indicated this change has been more disadvantageous to Korea than other economies as the country is heavily dependent on exports of intermediary and capital goods, the demand for which was closely related to global investment. Intermediary and capital goods accounted for 64.2 percent and 23.2 percent, respectively, of Korea’s outbound shipments in 2014, compared with the world averages of 47.9 percent and 15.6 percent. The share of consumer goods in the country’s exports remained at 12.1 percent in the cited year, far below the global average of 22.3 percent.

Jung Kyu-chul, a KDI researcher, noted that Korea needed to change its industrial structure in the direction of augmenting the consumer goods industry, given the high possibility of global investment continuing to remain sluggish for a considerable period of time to come.

In particular, Korea is placed to be more susceptible to China’s transition from investment-fueled expansion to consumption-driven growth as it has mainly exported intermediary and capital goods to its largest trading partner. The International Monetary Fund forecast in a report published in early May that Korea’s growth would decrease by 0.11 percentage points if China saw its domestic consumption and investment rise and fall by 1 percentage point, respectively.

In an interview with a local daily last month, a senior IMF official advised Korea to export more consumer goods to China, noting the impact of China’s shift to a new growth model would still be felt hard even if its economic expansion accelerated again.

Efforts to spur the consumer goods sector can be made more effectively in tandem with measures to boost the service industry.

Experts note drastic deregulation is crucial for upgrading and expanding the service industry, which would help bolster domestic demand, create more jobs and find more business opportunities abroad.

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