No rose-colored glasses, pleaseHopes that the South Korean economy would pick up speed in growth were dashed because the United States and other developed countries cannot be expected to pull the growth of the world economy next year after overcoming their long recessions. The recovery pace of the export-oriented Korean economy will depend on a rebound in the United States and other advanced economies.
The U.S. Treasury warned that the world’s largest economy could plunge into a downturn worse than the Great Recession if the U.S. Congress drags its feet on raising the debt ceiling and markets are rattled because of the possibility of a U.S. default on its debt obligations.
If the major economies underperform on expectations next year, so will the Korean economy. The government may once again face a revenue shortfall. Budget planners estimated how much money the government would have to spend based on an outlook of 3.9 percent growth next year. That could be much lower if the developed economies falter. The employment rate, likewise, will hover below expectations. The country’s fiscal health could worsen if the current slowdown is prolonged into next year.
Research institutes and analysts at home and abroad are expected to downgrade the 2014 growth estimates of the global economy. The Korean economic outlook will also probably be cut. The International Monetary Fund, which is due to announce its global economic outlook for next year, is expected to revise the Korean growth estimate down to 3.7 percent from 3.9 percent. The Asian Development Bank, which will soon follow suit, is expected to cut Korea’s outlook to 3.5 percent growth from 3.7 percent. The Bank of Korea is also probably set to lower next year’s growth forecast to 3.8 percent from 4.0 percent.
If the Korean economy grows at a mid 3 percent rate next year, the government cannot meet its macroeconomic goals within its budgetary limits. The Korean economy may slip into a structural slowdown tied to the slump in the global economy. If tax revenues fall short because of slower-than-expected economic growth, the government inevitably would have to prepare a supplementary budget in order to run state machinery and cover the cost of increased welfare spending.
The government will have to revise its overall economic policy outline for next year by setting aside blind optimism and coolly evaluating the actual circumstances at home and abroad. The right prescription is only possible when the diagnosis is correct.