Even with stimulus, 2015 growth will only be 3.1%, says gov’t

The government Thursday lowered its estimate of economic growth for the year from 3.8 percent to 3.1 percent - and even that is conditional on a stimulus package of roughly 15 trillion won ($13.5 billion) in government spending.

It was acknowledgement that the outbreak of Middle East respiratory syndrome (MERS), a drought and struggling exports had brought growth below 3 percent, and stimulus is needed to push it back.

Last year, the government believed improvement in consumer spending would push inflation to 2 percent this year, but it now predicts inflation to languish at 0.7 percent.

Many state-run and private research think tanks project this year’s growth to be in the range of 2.7 to 2.8 percent without further stimulus.

“Domestic consumption and services, which showed some signs of recovery earlier in the year, have shrunk again after the MERS outbreak,” said Deputy Prime Minister and Finance Minister Choi Kyung-hwan on Thursday. “The impact is even more severe than after the sinking of the Sewol ferry last year.”

Choi announced the government’s economic policy direction for the second half along with five other economy-related ministers at the Seoul Government Complex.

“Even if the MERS crisis comes to end soon, such a negative influence on our economy is expected to hinder Korea from catching up with its previous growth forecast,” he said.

“With the fiscal stimulus, the government will do our best to maintain our growth rate above the 3 percent mark,” he added.

The stimulus package includes a supplementary budget and early investments by government organizations, Choi explained.

Choi said money for the stimulus package will come from a tax surplus or Bank of Korea reserves, although it will have to come from issuing government bonds.

Choi said that “choosing to go for stimulus [largely via government bond issuance] may result in the downgrading of Korea’s fiscal soundness for a while, but it was a necessary choice because the nation may fall into a cycle of low growth if the slowdown doesn’t pick up as soon as possible.”

Choi also promised to make up for tax revenue shortfalls, boost youth employment, expand state-run export financing programs for the private sector, raise the minimum wage, encourage the middle class to invest in financial markets with tax breaks, and reform the educational system.

The finance minister, however, did not give the details on the supplementary budget spending because the government is still negotiating that with Saenuri Party lawmakers.

Choi said the details will be finalized by early July so the budget can pass in the National Assembly and be executed as soon as possible.

Private sector financial analysts, however, are saying that 15 trillion won won’t be enough to boost the economy to the 3 percent growth level.

“No upside surprise here,” said Frederic Neumann, co-head of Asian Economic Research at HSBC, and Joseph Incalcaterra, economist at HSBC, in a report released Thursday regarding the supplementary budget. The economists said 15 trillion won is not enough and more needs to be done, including another interest rate cut by the central bank.

“It’s not a huge boost, especially considering that the new package is partly designed to make up for expected tax revenue shortfalls, thus additional spending is less than meets the eye,” the economists said.

The supplementary budget announced Thursday was the second for the Park Geun-hye administration, followed by one in 2013, worth 17.3 trillion won, also aimed at accelerating economic growth. It raised the growth rate by 0.6 percentage point.

BY KIM JI-YOON [kim.jiyoon@joongang.co.kr]