Worsening external conditions, faltering domestic consumption cloud the outlook further


When an illness spreads too far, few kinds of medicine can bring it back under control.

The implication of the newly unveiled economic policy blueprints fits this scenario, unfortunately, as the impact is seen as severely limited, if not altogether ineffective.

The Finance Ministry’s set of plans, announced on Monday, are aimed at fighting the stubbornly strong downward pressure on Asia’s fourth-largest economy, but negative forces such as price instability and the eurozone debt crisis seem too powerful to contain, at least for the time being.

According to the plans, the government will frontload 60 percent of the budget in the first half of next year and come up with measures designed to alleviate household debt problems.

But such plans are far from drastic or creative, as the government often resorts to the budget allocation to cope with an economic slowdown.

At the heart of the issue is that the Finance Ministry’s new economic policy prescriptions target superficial symptoms, not the root cause of the illness.

The Korean economy is now faced with snowballing household debt and faltering private consumption. To address these key issues, a new growth momentum should be engineered to bolster household income and encourage firms to recruit more and invest in new facilities in a way that nurtures a virtuous cycle in the long term.

With key elections scheduled next year, however, the government appears incapable of drawing up a long-term plan, while economic conditions get worse by the day.

As expected, the Finance Ministry’s growth forecast for next year was slashed to 3.7 percent in reflection of a slew of unfavorable factors that threaten the domestic economy.

The revision is in line with the Bank of Korea’s latest projection of a 3.7 percent growth for next year announced on Friday.

The downbeat forecast has to do with the expected decrease in demand for Korean goods in overseas markets next year.

Korea, as an export-dependent country, confronts a negative prospect in its drive to increase outbound shipments. The BOK report projects that export growth will “slow considerably, owing to the cooling of world trade growth” next year.

The inflation growth is expected to reach 3.2 percent next year, down from an estimated 4 percent this year, but consumers are unlikely to feel upbeat because the growth pace of 3.7 percent next year is not fast enough.

The widening gap between individual’s income and broader economic growth also led to slowing domestic consumption this year, which suggests there’s little room for expanded private consumption next year unless the average income goes up significantly.

By Yang Sung-jin (insight@heraldcorp.com)