Additional stimulus mulled to bolster weakening economy

The growing signs of the Korean economy weakening amid deteriorating conditions at home and abroad are prompting the government to work on additional stimulus measures.

Economic indicators have taken a steep downturn in recent months.

The on-year increase in the number of employees remained at 212,000 in August, the lowest in four and a half years, according to Statistics Korea.

Output in the sector of restaurants and accommodating facilities fell 4.3 percent from a year earlier in July, reflecting the deepening woes of self-employed businesses in the country.

Construction orders dropped 30.8 percent on-year in July, compared with a 34.2 percent increase in April. Local builders’ suffering is set to deepen as housing construction is being dampened by measures announced last month to curb rising home prices.

The slump in the construction industry is likely to further exacerbate the unemployment problem and consumer sentiment.

The external environment surrounding the Korean economy is also expected to become riskier and more complex down the road.

Tensions over North Korea’s nuclear and missile tests have been escalating, with China showing no signs of easing its economic retaliation against Seoul’s hosting of a US anti-missile system to cope with threats from Pyongyang.

The US Federal Reserve’s decision last week to wind down a stimulus program put into practice following the 2008 financial crisis could heighten the volatility of local financial markets.

Officials at the Ministry of Strategy and Finance suggest the government will put forward a set of measures aimed at bolstering the economy as early as this week or after the Chuseok holiday in October at the latest.

In July, the ministry revised up its 2017 growth outlook for the economy to 3 percent from the previous forecast of 2.6 percent, citing effects from planned additional fiscal spending. The 11.2 trillion won ($9.7 billion) supplementary budget passed the parliament later in the month.

Many economists predict the government’s growth target for this year will be out of reach.

“The slumping construction business alone is forecast to drag down this year’s growth rate by 0.2 to 0.3 percentage points,” said Song Won-geun, vice president of the Korea Economic Research Institute, a private think tank.

According to data from the Bank of Korea, the country’s economy recorded an on-quarter growth of 0.6 percent in the April-June period, down from 1.1 percent in the preceding three months. The growth rate is unlikely to bounce back in the third and fourth quarters, given the lackluster economic indicators.

Government policymakers, however, seem to be adhering to the growth goal of 3 percent, which President Moon Jae-in said would be achievable on the back of the extra budget.

An MOSF official, requesting not to be named, expressed concern over a possible backlash triggered by the new administration’s economic underperformance in its first year.

The additional stimulus package is expected to include measures to encourage profitable public corporations to increase investment and lower individual consumption tax on car purchases.

The government also hopes that a nationwide bargain sales event joined by hundreds of major retailers and manufacturers, which will begin Thursday to run through Oct. 31, will help boost consumer spending.

But the need for curbing mounting household debt will limit efforts to spur domestic consumption. The government’s measures to push down house prices and slash infrastructure spending also contradict policies for boosting domestic demand.

There will be little room for the BOK to ease its monetary policy to help boost growth, as it is expected to come under increasing pressure to raise its key interest rate if the US goes for an additional rate hike this year in addition to the move toward ending the crisis-era stimulus.

Exports have remained a rare bright spot for the Korean economy, increasing 45 percent and 54 percent from a year earlier in the first and second quarters of the year, respectively, according to data from the Korea International Trade Association. But excluding the semiconductor sector which has experienced a record boom since last year, the increase rates fell to 10 percent and 12 percent in each of the corresponding periods.

Analysts say underlying Korea’s sagging growth momentum is the weakening of its industrial competitiveness across the board except for the information technology sector.

Global shares of Korean manufacturers in shipbuilding, petrochemicals, autos and textiles are projected to decline from 36.2 percent, 5.4 percent, 5.2 percent and 2 percent in 2015 to 20 percent, 4.7 percent, 3.8 percent and 1.2 percent in 2025, respectively, according to a study by a local research institute.

Korea’s on-year growth rate of 0.6 percent in the second quarter was lower than those for most Group of 20 member states. Turkey grew at the fastest pace of 2.05 percent, followed by China at 1.7 percent, India at 1.37 percent, Indonesia at 1.2 percent and Canada at 1.09 percent.

Criticism has been growing that measures pushed by the Moon administration since he took office in May have only increased corporate costs, further undermining the competitiveness of major manufacturing industries.

Kim Jung-sik, a professor of economics at Yonsei University, noted the government-draft budget bill for next year conspicuously lacked support for fostering new industries.

“Korea urgently needs innovative industrial policies and sweeping regulatory reforms to shore up its long-term growth,” he said.

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