KDI joins 2019 GDP growth downgrade rush

Yet another GDP growth forecast downgrade has rolled in, the second in as many days.

On Wednesday, the Korea Development Institute (KDI) reduced its outlook for 2019 to 2.4 percent from 2.6 percent.

It also added a subjective downgrade, saying that the country is edging closer to a low-growth period like the one experienced in the wake of the 2008 financial crisis.

The government think tank’s outlook raises doubts that the country will be able to hit the government’s forecast of 2.6 to 2.7 percent growth in 2019.

KDI’s adjustment matches the change announced by the Organization for Economic Cooperation and Development (OECD) just a day earlier.

The OECD’s downgrade, also from 2.6 percent to 2.4 percent, comes just two months after its last downgrade.

The KDI cited shrinking exports and a sluggish domestic economy as the primary reasons for the lowering of growth projections.

The research institute noted especially the slowing growth of consumption in the private sector despite the government’s income-led growth policies.

When projecting this year’s growth last year, the KDI estimated consumer spending would increase 2.4 percent in 2019. However, in the latest forecast, consumer spending is expected to increase 2.2 percent.

Since taking office, the Moon Jae-in government has aggressively pushed its income-led growth policy, driving up incomes to stimulate spending. It decisively raised the minimum wage, lifting it more than 29 percent over two years.

“There’s a possibility that the economy could see a decline in its growth rate due to the side effects of the higher minimum wage and the shorter workweek,” said Kim Hyun-wook, macroeconomic policy director at KDI. “In the mid-to-long term, there’s a need to focus on creating an environment that will raise Korean productivity.”

The KDI projected investment this year will decline 4.8 percent, a significant turnaround from a 1.3 percent increase projected earlier.

The state think tank said the decline in investment is largely the result of weak exports.

The struggling property market is also expected to weigh on investment, as construction is likely to be curtailed.

It is expected that construction investment will contract 4.3 percent, compared to the earlier estimate of a 3.4 percent contraction.

The KDI didn’t see much change in the job figures as it anticipates an increase in the number of public sector jobs. It sees the unemployment rate coming in at 3.8 percent, down from its previous estimate of 3.9 percent.

Annual employment gains are expected to come in at about 200,000, more than double the gains last year.

“When we made previous projections, we excessively estimated the negative impact of the minimum wage increase,” Kim said. “But we re-evaluated considering the increase in government jobs in the health, welfare and medical service.”

The KDI believes that recovery will begin in the first half of 2020, a shift from the earlier prediction of the second half of 2019.

But it added that it is difficult to say whether the economy will experience a strong recovery as industries other than semiconductors could rebound slowly.

President Moon earlier expressed optimism that the Korean economy would be one of the fastest growing in the G-20 and in the OECD.

BY LEE HO-JEONG [lee.hojeong@joongang.co.kr]