KDI lowers its 2019 growth forecast to 2.0%

State-run think tank Korea Development Institute (KDI) downgraded Korea’s economic growth this year by 0.4 percentage points to 2.0 percent amid sluggish investment and exports.

The think tank was also downbeat about next year’s growth, cutting its estimate by 0.2 percentage points to 2.3 percent.

The updated projections, from the think tank’s biannual economic forecast released Wednesday, falls in line with recent revisions from global institutions.

The IMF last month slashed Korea’s growth this year by 0.6 percentage points to 2.0 percent, while also downgrading next year’s growth by 0.6 percentage points to 2.2 percent.

KDI’s revisions come as facilities investment recorded on-year declines since the second quarter of last year, while exports have fallen since last December.

Finance Minister Hong Nam-ki has set a goal of reaching at least 2 percent growth this year. Global credit rating agency S&P expects 1.8 percent growth.

The think tank also expressed cautious optimism about next year’s economic situation, banking on a recovery to semiconductor demand.

“Due to the delayed recovery in global semiconductor demand, facilities investment will fall by 7 percent this year,” read the report.
“But it is expected to rise by 8 percent along with a recovery in exports in 2020.”

KDI forecasts a current account surplus of $58.9 billion next year compared to this year’s estimate of $57.5 billion.

It urged more action through monetary policy.

“As a response to low inflation and downward pressures on the economy, there’s a need to take further steps in monetary easing,” said the KDI. “Domestic economic activity is sluggish and external uncertainties continue to exist, so monetary easing is needed to back up economic recovery.”

The country recorded its first-ever negative inflation in September, while inflation has remained below 1 percent throughout the year. The think tank said inflation is expected to be 0.6 percent next year compared to an estimate of 0.4 percent this year.

The central bank has already cut the benchmark interest rate two times this year, taking the rate down to a historic low of 1.25 percent. It will make another rate decision later this month.

The think tank was receptive to expansionary spending proposed by the government next year. It may hit a record budget of 513.5 trillion won ($439.5 billion) by issuing deficit-covering bonds worth 60.2 trillion won.

“While the debt-to-GDP ratio is expected to rise to nearly 40 percent, this results from a short-term response to the economic situation and should not just be interpreted as harmful,” said the think tank.

The record budget has been caught in the crossfire between the ruling and opposition parties, with the main opposition Liberty Korea Party saying it would seek reductions of 14.5 trillion won.

Finance Minister Hong Nam-ki expressed strong disapproval to the opposition party’s plans in a radio interview with local broadcaster MBC on Wednesday.

“Fiscal spending is not a waste but a preemptive investment into the future,” said Hong. “Cutting next year’s budget by over 14 trillion won would be a complete belt-tightening measure.”

The KDI report noted that much of the economy’s growth lately has been reliant on government spending.

“By maintaining expansionary fiscal policy in response to downward pressures to the economy, the government has been responsible for a significant portion of economic growth,” read the report.

BY CHAE YUN-HWAN [chae.yunhwan@joongang.co.kr]