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The Ministry of Strategy and Finance yesterday announced a revised growth forecast of 2.7 percent this year, up 0.4 percentage point from its initial prediction, saying the 17.3 trillion won supplementary budget passed by the National Assembly in late April has had a positive effect.
“It is little bit early to expect real effects from a series of economic policies, but the economy rebounded in the first quarter with signs of recovering consumption and investment,” said Hyun Oh-seok, deputy prime minster for economy and minister of strategy and finance at a press conference with the Ministry of Employment and Labor, Ministry of Land, Infrastructure and Transport, Ministry of Health and Welfare and the Financial Services Commission held at the government complex in Gwanghwamun, central Seoul.
“In order to stop the current slow-growth trend, the government will use macroeconomic policies more actively, combining fiscal, monetary and exchange rate policies in the second half of the year,” Hyun said.
Despite recent shocks to the financial market triggered by possible tapering of U.S. quantitative easing and worries about a credit crunch in China, the government is determined to stop the eight-quarter-long stagnation and ramp up growth to 3 percent by the end of the year.
A critical goal is to reach 1 percent growth in the third quarter. For the past eight quarters, growth has been less than 1 percent. It is the first time the Korean economy has posted such low growth rates for so long.
“Our economy is taking a similar path to that of Thailand, which abruptly stopped growing after the 1997 Asian financial crisis,” said Choi Sang-mok, director general of the economic policy bureau at the Ministry of Finance. “We really need 1 percent on-quarter growth in order to achieve gradual recovery.”
The higher growth forecast has resulted in rosier predictions for other indicators. The target number for newly-employed people has gone from 250,000 to 300,000, while the employment rate goal has been raised from 64.6 percent to 64.7 percent. The ministry revised the trade surplus target to $38 billion from $29 billion.
The brighter outlook for the second half was based in part on the government’s view that tapering of U.S. quantitative easing would be a sign of global recovery.
The Finance Ministry said it will make an all-out effort to boost private consumption and business investment in the second half in the belief that the latter part of the year is vital.
“We are now at a critical point that determines the fate of our economy,” Choi said. “If we fail to stop the current downturn, we might not be able to do so for a long time.”
The government said it will inject an additional 1 trillion won into the market, including 500 billion won in the public sector. It will induce private companies to add 200 billion won to social overhead capital investment and 300 billion won to private sector investment.
In July, the Ministry of Finance will announce the second package of investment promotion measures, with a focus on easing some regulations.
Some experts, however, are skeptical about the government’s upbeat goals.
The Korea Economic Research Institute recently lowered its growth forecast to 2.3 percent from 2.9 percent. “We decided to cut the prediction due to slow improvements in the global economy,” said Byeon Yang-kyu, a research fellow at the institute. He said the supplementary budget would help the economy grow by only 0.1 percentage point.
“The latest upgrade in the government forecast was probably made because the earlier prediction was too low,” said Chung Young-sik, a research fellow at Samsung Economic Research Institute. “There are too many risks outside the country, including those in the United States, China and Europe, so it is too early to be assured of recovery.”
The domestic market has remained stagnant, with the private consumption index compiled by the Bank of Korea showing a 0.4 percent drop in the first quarter after posting less than 1 percent growth for the past two years.
Because the government believes that the economy is at a crossroads, it has decided to rethink the timing of economic democratization policies.
“The scope, level and timing of each policy related to economic democratization will be discussed among government branches in order to prevent those policies from affecting the economy,” the finance minister said. “The economy is all about confidence. The government will create an environment where companies can invest more in the second half.”
The minister earlier mentioned that “economic policies shouldn’t contract businesses’ operations in the market,” referring to a controversy over legislation at the National Assembly to regulate conglomerates under the economic democratization initiative.
BY SONG SU-HYUN [ssh@joongang.co.kr]
