The government recently struck an upbeat tone on the outlook for the country’s economy in an abrupt change of stance that many economists think is not backed by solid evidence.
In its latest economic assessment report published last week, the Ministry of Strategy and Finance forecast Korea’s industrial output and domestic demand, which have remained sluggish for months, to show a slight recovery later this year.
The report, called the Green Book, said that a protracted slump in the country’s exports was expected to ease in the coming months, while the measure taken in February to extend an excise tax cut might have a positive effect on consumer spending.
Presiding over a meeting of senior ministry officials earlier last week, Finance Minister Yoo Il-ho said recent economic indexes shed light on some positive aspects seen amid difficult conditions.
“Spring is now coming,” he said.
This upbeat tone marked a sudden shift from the government’s worried views on Korea’s economic situation and outlook.
In her public statement in January, President Park Geun-hye warned that, without preemptive reforms, the country might once again suffer from enormous socioeconomic costs and massive layoffs similar to those it had endured during the 1997-98 foreign exchange crisis. Yoo said last month that unfavorable external and internal conditions were weighing on the Korean economy.
Figures cited in the Green Book as signaling a recovery included on-month improvements in domestic car sales and exports in February.
Some economists, however, argue that the government’s change in perception seems overly naive, citing a report released by the Korea Development Institute, a state-run think tank, last week saw Asia’s fourth-largest economy as having entered a slowdown due largely to declining exports and sluggish domestic spending in tandem with weakening global demand.
“Korea’s major economic indicators pointed to continuing sluggishness, signaling a gradual deceleration in growth,” the report said.
The country’s exports dropped by 12.2 percent from a year earlier in February. This was a slower pace of decline than January’s 18.8 percent, but still extended the country’s longest-ever losing streak to 14 months.
Industrial output fell by 1.9 percent on-month in January, with the manufacturing inventory-to-shipments ratio standing at 128.4 percent, up from 120.6 percent a month earlier.
The KDI report said domestic demand also showed signs of weakening, as consumer sentiment recorded an eight-month low of 98 in February.
Critics say the recent turnaround in the government’s economic outlook may be related to the upcoming general election.
The disappointing economic performance by the Park administration may well provide opposition parties with ammunition in the lead-up to the April 13 vote. The growth rate fell to 2.6 percent in 2015, the lowest for any year preceding a major election, and the youth unemployment rate reached a record high of 12.5 percent in February.
But government officials have dismissed suspicions that their latest optimistic economic outlook is politically motivated. If anything, it should be understood as part of efforts to prevent the sentiment of households and companies from being frozen to further dampen consumption and investment, they say.
“It’s necessary to be cool-headed on reality but we still have to be cautious against being drowned by excessive concern,” Yoo said in the meeting with his staff.
Policymakers’ attempt to put forward an upbeat prospect may also seem to reflect the lack of effective policy tools to prop up growth. If they paint a gloomy picture of the economy, they are likely to come under pressure to take bolder actions.
“The government may now find it difficult to resort to macroeconomic means such as fiscal and monetary policies, which carry too much uncertainty with them,” said Lee Jun-hyup, a researcher at the Hyundai Research Institute, a private think tank.
Export performance in the coming months is seen to hold the key to whether the positive economic outlook will turn into reality as the effect of the measure to extend the excise tax cut is set to dissipate soon.
Vice Trade Minister Lee Kwan-sup told reporters this week that the country’s exports have shown signs of rebounding in March due to rising oil prices and increasing demand for steel and semiconductors.
The government is scheduled to unveil a package of measures later this month to strengthen support for exporting firms and remove trade-related regulations.
By Kim Kyung-ho