The central bank’s latest economic outlook should reawaken policymakers to the need to redouble their efforts to keep the Korean economy out of a low-growth trap and away from the specter of deflation.
Last week, the Bank of Korea cut its economic growth outlook for this year to 3.1 percent, 0.3 percentage points lower than its last adjustment in January. Revising the forecast for the fourth time, its second in three months, the BOK cited the weaker-than-expected gross domestic product data in the fourth quarter of last year.
Given that the BOK is generally optimistic in its growth predictions, some economists take a growth rate of lower than 3 percent for granted. In fact, foreign financial institutions have already put the growth rate in the range of 2.5 percent to 2.9 percent.
The weaker growth outlook was coupled by the forecast that consumer prices would grow 0.9 percent this year, down by 1 percentage point from the previous estimate three months ago. And even this is after including the recent surge in tobacco prices, which accounted for 0.6 percentage points.
As one knows, low growth and low inflation are the consequences of sluggish exports and weak domestic consumption. What deepens our concern is there are no signs of improvement anytime soon.
In a recent report on the world economic outlook, the International Monetary Fund said Korea was facing a rapid reduction in its working age population and should brace for an extended period of low growth.
We must admit that the days of high growth are gone, but low growth will strain the already narrow job market for youths, hurt tax revenue and hamper consumption and investment. Deflation is harmful to the economy, pushing up real interest rates and sending the signal of further economic slowdown to market players.
Against this backdrop, Park’s economic policy team seems overly optimistic. Ahn Jong-beom, Park’s chief economic aide at the Blue House, said earlier this month that economic recovery is gaining momentum as the vitality in the real estate sector and stock market is spreading to the real economy. Finance Minister Choi Kyung-hwan made similar comments. But those remarks reflect their hopes more than they are a fair assessment of the realities.
What’s more worrisome is that noneconomic issues ― including the Sung Woan-jong scandal, the April 29 by-elections, the anniversary of the Sewol ferry disaster and unions’ protests against reforms of the civil service pension and labor market ― may hamper the already tough task of pulling the national resources together to resuscitate the economy.
