Gov’t slashes growth estimate

The government cut its economic growth forecast to 2.3 percent for this year from 3 percent, citing a low growth trend that has stretched for eight quarters amid increasingly tough prospects at home and abroad.

The government’s forecast is the lowest among estimates ranging from 2.8 percent to 3.4 percent made by the Bank of Korea and numerous private institutions.

According to the first economic policy package of the Park Geun-hye government unveiled by the Ministry of Strategy and Finance yesterday, this year is going to be tougher than last year with anemic GDP and job growth, due to persisting external uncertainties.

“Since the country has an open economy that is particularly vulnerable to external conditions, even a mild shock can push the economy into a further slowdown,” said Choi Sang-mok, director general of the economic policy bureau of the Finance Ministry.

“The government is now less confident about economic recovery than three months ago,” Choi said, “because economic indicators turned out to be worse than expected in the first two months of this year.”

The official explained that the government decided to slash the GDP growth forecast to 2.3 percent, far below the 2.8 percent forecast of the Bank of Korea, for some technical reasons. Quarterly growth figures have been bad enough to do so.

The Korean economy grew less than 1 percent on-quarter for the past seven quarters. The Q4 GDP growth for last year was 0.3 percent, which directly led to a lower forecast for this year, the official said.

“We also have a gloomy prediction for Q1 GDP growth of this year considering poor economic indicators in January and February,” Choi said.

The country’s industrial output, especially in mining and manufacturing, kept dropping in January and February. Industrial output is crucial to estimating Korea’s GDP growth.

Exports have remained sluggish since the beginning of the year. Domestic market is even worse, according to the ministry, because of flat private consumption and investment by businesses.

A lowered forecast for global economic growth affected the government’s decision, too. The International Monetary Fund recently cut its forecast from 3.6 percent to 3.5 percent. Due to the U.S. sequester cuts and euro zone risks, there remain chances of the rate dropping further, he said.

Possible shortfalls in government’s tax revenue could be a drag on economic growth too, Choi said.

“There are possibilities that the government can’t raise enough tax revenues this year, which would hinder boosting the economy,” he said.

If the government wants to carry out the president’s pledges, it needs a total of 134.5 trillion won ($120 billion) for the next five years. It plans to secure 53 trillion won over the period by reducing tax exemptions and tax deduction benefits and tapping into the underground economy. For the remaining 81.5 trillion won, the government has to cut its planned expenditures. The government had set this year’s spending at 342.5 trillion won.

“Taking all these factors into account, we have come up with the 2.3 percent growth forecast,” Choi said.

For job creation, the government made another conservative estimate. The ministry forecast 250,000 new jobs will be added to payrolls throughout the year, down from a previous goal of 320,000. Because the current economic situation is relatively bleak, the Park government unveiled a 100-day action plan, including a supplementary budget, expanding social overhead capital investment and increasing financial support for small exporters.

In April, the government will announce the size of the long-awaited supplementary budget. The extra budget is expected to be around 10 trillion won, according to market watchers.

The additional budget is part of the government’s plan to spend more than 60 percent of the annual budget in the first half of the year in a bid to accelerate economic recovery.

“Fiscal policy should play an active role in vitalizing the flagging economy,” said Hyun Oh-seok, deputy prime minister for economy, “A supplementary budget will help raise the growth forecast up to 3 percent.” Separate from the extra budget, the government will make an additional 1 trillion won investment in social infrastructure. To help small exporters, the government decided to increase its support for the central bank to provide loans with low interest rates to commercial banks to encourage them to expand their lending to small exporters. The BOK currently provides 9 trillion won loans in total, and the amount could increase.

Meanwhile, the BOK’s monetary policy committee made its own decision to fix the amount yesterday, implying that there may be a possible misalignment between the government and the central bank on the economic stimulus plan.

After the announcement of the policy package by the Finance Ministry, President Park attended a ministerial meeting led by Hyun to confirm the economic policy direction of the new government. “The key words of the Park government’s economic policy are ‘improving people’s lives’ and ‘achieving a creative economy,’?” Park said.

The public sector will hire 16,000 new employees this year, up from 15,000 last year.

By Song Su-hyun [ssh@joongang.co.kr]