KDI lowers 2018 growth estimate

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KDI lowers 2018 growth estimate

A leading government tank predicted that the Korean economy will expand by 2.9 percent this year, though it cautioned against the country’s heavy reliance on a few industries, such as semiconductors, for its growth.

“In 2018, the growth in the global economy will remain robust and the increase in exports and [domestic] consumption will improve,” said the Korea Development Institute (KDI), a government-run research institute, in a report released earlier this week. “But [overall] investment will shrink.”

According to the KDI, outbound shipments from Korea will grow by 3.8 percent compared to last year and domestic consumption will increase by 2.8 percent.

“The overall economy is gradually recovering,” said Kim Hyeon-wook, director and vice president of the department of financial policy at the institute.

But the rate of increase in total fixed investment will fall dramatically, according to the report. In 2017, total investment rose by 8.6 percent. This year, the rate of growth is expected to fall to 1.6 percent.

“Facilities investment, which showed an unprecedented increase last year [at 14.6 percent], will shrink with the slowdown of semiconductor-related investment,” the report said.

The think tank predicted that the Korean economy will expand by 2.7 percent in 2019, citing factors such as an expected slowdown in consumer spending.

The 2.9 percent growth in gross domestic product (GDP) for this year is on par with the prediction the institute made last December. But its estimate for first-half growth tumbled from 3.1 percent in December to 2.9 percent this time around.

“We didn’t think about the [sudden] rise in oil prices,” said Kim. “The rise in the price of petroleum is offsetting the positive force for the economy centered on consumption.”

The price of West Texas Intermediate oil stood at $68.21 per barrel as of May 30, the first time that global petroleum prices have neared $70 per barrel since November 2014.

Jeong Dae-hee, a research fellow at the KDI, said that increasing oil prices will negate the positive effects from the recent supplementary budget passed by the National Assembly, which was expected to bring up the growth rate by 0.1 percentage points.

Earlier this week, the Organization for Economic Cooperation and Development (OECD) announced its economic outlook for the year.

It forecasted that Korea’s GDP will expand by 3.0 percent through 2019, citing strong exports and domestic demand.

“The rapid growth of government spending, in part to expand public employment, will help support domestic demand and reduce the current-account surplus,” the organization said in its report. “The easing of geopolitical tension related to North Korea is a positive development.”

But despite its positive outlook, the KDI raised alarm about Korea’s current export structure.

“The unbalanced growth among industries, as shown by the failure to maintain growth in exports in more than a few sectors, such as semiconductors, raises concerns about the competitiveness of the Korean economy,” the think tank reported.

About 20 percent of Korea’s exports from January to April this year came from semiconductor shipments, according to data by the Ministry of Trade, Industry and Energy.

“If the price of chips fall or the pace in which the country loses its competitiveness in the sector increases as the Chinese economy catches up, it’s possible that the growth rate for our economy will fall short of expectations,” said the report.

The OECD also warned against the drastic increase in the minimum wage pushed by President Moon Jae-in.

BY CHOI HYUNG-JO [choi.hyungjo@joongang.co.kr]
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