Think tanks undercutting BOK outlook for growth

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Think tanks undercutting BOK outlook for growth

Has the central bank been too optimistic about next year’s economic growth?

It seems so, as outlooks from the Hana Institute of Finance, the Korea Economic Research Institute and other think tanks are lower than the one suggested by the Bank of Korea last week.

The central bank revised its outlook for next year from 4 percent to 3.9 percent. During a Thursday press conference, BOK Gov. Lee Ju-yeol said the outlook was lowered to account for the aggressive stimulus measures by the government, including an expansionary budget.

“We estimate the fiscal expansionary policy will raise economic growth by 0.2 percentage point,” said Lee. “Without such polices, growth would be 3.7 percent.”

However, in reports released yesterday, the Hana Institute of Finance and the Korea Economic Research Institute both projected next year’s economy will expand 3.7 percent.

Hana researcher Kim Young-jun said the government stimulus will help in mild recovery next year, but the policy will not be enough to sustain growth.

The researcher said the biggest problem is structural risk because of mounting household debt and a lack of investment.

Additionally, because of widespread skepticism that assets will rise in value, consumers and companies are unlikely to increase their spending because of the government stimulus program. Kim said it will be especially difficult for the policies’ effect on the economy to extend to the second half of next year.

“Structural risks of low [economic] growth will continue,” said Kim. “It is important to quickly implement various stimulus packages, including the expansionary budget and various tax reforms like larger dividend returns to investors. Negative sentiment will improve and investors and consumers will start to contribute to the recovery when they actually feel that the economy is bouncing back.”

The Korea Economic Research Institute even went on to warn about the possibility of the nation slumping into the kind of deflation that haunted Japan for decades.

The report noted that although the likelihood of Korea’s economy entering a deflationary cycle is not high at this point, the possibility shouldn’t be ignored.

It said that according to an analysis by the International Monetary Fund, various indices show signs that the Korean economy is weakening rapidly to the point where they are edging close to indicators that appeared in Japan just before the country entered a state of deflation.


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