Rekindling the economic embers

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Rekindling the economic embers

The Korean economy grew 1.1 percent in the second quarter, breaking the 1 percent mark for the first time in two years. But that still falls short of our expectations. We can’t be sure that the sluggish first half will be followed by a bounce back in the second half. Artificial causes like a supplementary budget, early spending of funds on expenditures and real estate stimulus measures have contributed to the latest growth. Moreover, only a few conglomerates enjoy growth thanks to smartphone and semiconductor exports, while small and mid-sized companies continue to struggle.

Sluggish investment in plants is a major concern. The growth rate of facility investment in the second quarter dropped by 0.7 percent compared to the previous quarter, and 5.1 percent compared to the same period last year. The government did its part by lowering the interest rates and offering fiscal measures. However, it wasn’t enough to stimulate the investment psychology of the private sector. At this rate, the economic recovery may remain temporary. Though we avoided the worst case scenario of 0 percent growth, we can’t be sure if we can accomplish the government’s goal of 3 percent growth in the second half.

There are considerable external variables. The United States has warned of reduced quantitative easing, and China’s economic growth has considerably slowed down. Japan’s Abenomics and low yen trend also threaten Korea’s exports. Household debt and shrinking tax revenue keep increasing pressure on the economy. Rather than pursuing continuous growth, we may have to focus on risk management. The most important task is to continue the flow of the economic recovery. We cannot afford to expand the welfare system with reduced tax revenue. Growing household debt may strike the sluggish real estate market.

In order to encourage consumer spending and plant investment, the government needs to meticulously control the psychology of economic entities with thoughtful policy combination. The authorities must refrain from excessive economic democratization measures based on political rhetoric or overuse of tax inspections.

The excessive egocentrism of militant unions will only drive away corporate investments. Rather than dragging down some thriving companies, the focus should be on expanding assistance for small and mid-sized enterprises to enhance their competitiveness. This is the only way to rekindle the precious, hard-earned embers of the economic recovery from the second quarter. It all depends on how we take advantage of this green light to return to the mid-3 percent potential growth rate by next year.
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