Actions are better than forecastsThe government and Bank of Korea upgraded their GDP growth estimates for this year. In its economic policy outline for the second half of 2013 on June 27, the Ministry of Strategy and Finance predicted the economy would grow 2.7 percent, compared to its earlier prediction of 2.3 percent. The Bank of Korea on July 11 raised its estimate to 2.8 percent from 2.6 percent. Both forecast the economy would grow in the 3 percent range in the second half thanks to fiscal stimulus measures and a pickup in global economy.
Other domestic research institutes have given comparable estimates. The Korea Development Institute and Korea Institute of Finance both forecast at 2.6 percent, while the National Assembly Budget Office predicted 2.8 percent and Hana Institute of Finance 2.7 percent growth.
However, international organizations and banks take a contrasting point of view, cutting their economic forecasts for Korea. Growth estimates by 11 multinational investment banks averaged 2.7 percent as of the end of last month, down from 3 percent six months ago. Multinational accounting firm Ernst & Young sharply cut its estimate for Korea to 2.1 percent from 3.3 percent. Rating agency Moody’s Investors Service also downgraded its estimate from 3 percent to 2.5 percent. They cited a prolonged slump in private consumption and contraction in capital investment as major factors that will weigh down the local economy, despite government stimuli.
Prospects for the global economy - which significantly impact export-dependent Korea - are also unclear. The World Bank cut its global growth estimate to 2.2 percent from 2.4 percent earlier this month. IMF Managing Director Christine Lagarde also has indicated that the international lender will soon cut its global growth outlook for this year. “The global growth outlook will be somewhat less than we anticipated just three months ago,” she said. In fact, the economies of the United States and European Union are slowly recovering, while China and other emerging markets are showing signs of slowing.
International groups and foreign experts generally believe the government’s stimulus measures and global economic performance will not be likely to help the Korean economy very much the rest of the year. Local and foreign analysts’ predictions vary slightly, but they mostly agree that Korean economic growth will be around 2.5 percent this year. There is a consensus that the Korean economy is likely to continue to underperform, growing no more than 3 percent this year following a meager growth of 2 percent in 2012.
But the discrepancy is a matter of perspective and direction. The government and the central bank forecast that the outlook for the Korean economy would improve in the latter half, while foreign analysts see the opposite. The gap in the outlook could serve as a crucial factor in shaping Korea’s economic path and policy. The government could maintain its current policy direction - if the outlook indeed improves.
But if the economy stumbles in the second half as predicted by international agencies and banks, Seoul should veer its economic policy in an entirely new direction.
Unfortunately, domestic and foreign economic conditions indicate the international view may be more correct. Economic factors at home and abroad are turning from bad to worse. Companies are refraining from investment - despite government encouragement - and consumer spending shows little signs of picking up. External circumstances are even more serious. The much anticipated recoveries in the U.S. and EU economies are delayed and China is slowing down faster than expected, which could deal a heavy blow to Korean exports. The rosier expectations from the Korean government and central bank may turn out to be wishful thinking.
A higher growth target won’t be a big problem if the government has the will to achieve it. But local authorities are merely offering optimism without real actions. The economy has no chance of recovery if policy makers are heedless and evasive about grim economic realities. That is tantamount to taking a step back and watching the economy tip over. President Park Geun-hye and her government have so far not demonstrated a resolute will to tackle the structural slowdown. Actions stopped at makeshift supplementary budgeting and real estate stimulus measures. Deregulation was inconsistent and conflicting, while the vision for building a creative economy to boost jobs remains fuzzy.
But the government has instead come up with harsher anti-business actions - such as legislation to restrict corporate activities under the guise of economic justice - and tougher tax audits, which ended up eroding government spending on the economy and muddling the direction of policy. The government lacks a broad macroeconomic vision and, instead, is employing various conflicting microeconomic policies. As a result, individual policies are unproductive and disorganized.
How wonderful would it be if the government’s optimistic forecasts could make the economy get better. But that’s just fantasy. No matter how the government packages it today, the Park administration will get its report card on economic performance at the end of the year. We will know who is right then. I just hope the government gets its act together before it’s too late.
*The author is an editorial writer of the JoongAng Ilbo.
by Kim Jong-soo