Last week the Bank of Korea forecast that the country’s economy would expand around 2 percent this year, marking the central bank’s fourth downward revision of its growth outlook for 2019 over the past year. The growth estimate was lowered from 2.7 percent late last year to 2.6 percent in January, 2.5 percent in April and 2.2 percent in July.
The BOK also trimmed its growth projection for next year to 2.3 percent, down from 2.5 percent forecast in July.
The central bank’s latest growth outlook revision both preceded and followed the release of gloomy economic data.
According to data released by Statistics Korea earlier last week, the country recorded simultaneous decreases in industrial output, retail sales and facility investment in October. Compared with a month earlier, industrial production fell 0.4 percent, retail sales slid 0.5 percent and facility investment declined 0.8 percent.
Separate figures released by the Trade Ministry on Sunday indicated that South Korea’s exports decreased 14.3 percent in November from a year earlier, extending the downward streak for a 12th consecutive month. Outbound shipments from Asia’s fourth-largest economy reached $44.1 billion last month, down from $51.4 billion a year earlier, amid the prolonged trade dispute between the US and China and a slump in global demand for semiconductors.
Many private economic institutions at home and abroad have painted a grimmer picture of Korea’s economy than the central bank, predicting its growth rate will fall far short of 2 percent in 2019 and 2020.
The central bank expects the country to see a rebound in private consumption, exports and facility investment next year. But this prediction lacks support, with the economy facing a set of downside risks, including a protracted slump in global trade, greater sluggishness in China’s domestic demand and a delayed recovery in the semiconductor sector.
Finance Minister Hong Nam-ki, who doubles as deputy prime minister for economic affairs, said last week that the government would mobilize all policy tools to achieve a growth rate in the 2 percent range this year and to create momentum for an economic rebound next year.
President Moon Jae-in’s administration has expanded fiscal expenditure to bolster the sluggish economy. In step with fiscal expansion, the central bank has cut its key policy rate by 0.25 percentage point twice this year to a record low of 1.25 percent. BOK policymakers have suggested the possibility of an additional rate cut in the first half of 2020.
But the mix of fiscal expansion and monetary easing is insufficient to prevent the economy from being dragged into a low-growth rut. Even if the economy expands around 2 percent this year and 2.3 percent next year as forecast by the central bank, the figures will fall short of the country’s potential growth rate, estimated to be 2.5-2.6 percent. The potential growth rate refers to the maximum growth an economy can achieve through all factors of production without fueling inflation.
What is needed to realize the country’s growth potential, and bolster it, is to revitalize the private sector through regulatory, labor and structural reforms.
The government should implement sweeping deregulation and make the labor market less rigid to encourage companies to increase investment and improve their productivity.
Increased corporate investment will create more jobs and boost private consumption.
The Moon administration’s income-led growth policy has increased the burden on companies, which were already struggling to cope with deteriorating business conditions at home and abroad.
As a result, corporate profitability has worsened sharply -- reducing corporate tax revenue, which accounts for more than a quarter of total tax revenue. This will make it harder for the government to continue to increase fiscal spending without causing a steep rise in national debt. According to data from the National Assembly Budget Office, the national debt is projected to double over the coming decade to 1,490.6 trillion won ($1.26 trillion) by 2028.
The government has lowered its estimate for next year’s corporate tax revenue by 18.7 percent from this year, when it is estimated to reach 79.3 trillion won. But even the lower target may be out of reach, given that the combined operating profits of local listed firms are expected to shrink about 30 percent this year.
In a meeting with delegates from Fitch Ratings last week, Finance Minister Hong suggested the government would push for structural reforms as mid- and long-term tasks. But crucial reforms needed to strengthen growth potential should be undertaken immediately.