Gov't cuts growth outlook to 2.4-2.5%

Minister of Economy and Finance Hong Nam-ki speaks during a briefing on the government's policies for the latter half of 2019, at the Export-Import Bank of Korea in Seoul, Wednesday. / Yonhap

Temporary tax incentives for firms planned to revive investment

By Kim Bo-eun

The government lowered its 2019 growth forecast for the Korean economy by 0.2 percentage points to a range of 2.4 percent to 2.5 percent Wednesday, citing sagging private investment and sluggish exports amid the prolonged trade war between the United States and China.

The figure is down from the previous estimate of 2.6 percent to 2.7 percent made in December. The economy grew 2.7 percent in 2018 and is forecast by the government to grow 2.6 percent in 2020.

The Ministry of Economy and Finance unveiled the forecast along with policy measures for the second half to inject new vigor into Asia's fourth-largest economy.

The outlook downgrade is based on the ministry's gloomy forecast for private investment and exports, the twin drivers of growth.

The ministry expects facilities investment to shrink 4 percent in 2019, compared with the previous year's 2.4 percent contraction. It forecast exports to decrease 5 percent this year, a dramatic setback from the last year's 5.4 percent expansion.

"Investment and exports are in a bad condition due to worsening external and internal issues," the ministry said in a press release.

"The global economic slowdown is worsening and uncertainties for the latter half of the year are growing," the ministry said, citing lowered forecasts for world trade.

In order to tackle growing domestic and international challenges, the ministry introduced a package of measures focusing on reinvigorating private investment and exports.

The ministry said it will revise a law to temporarily expand tax incentives for companies investing in their facilities aimed at improving productivity.

It plans to increase the tax deduction for conglomerates and small firms to 2 percent and 10 percent, respectively, from 1 percent and 7 percent.

"In order to cope with the growing downward risks to the economy, investment must be revived," Finance Minister Hong Nam-ki said at a briefing held at the Export-Import Bank of Korea in Seoul.

"We will temporarily beef up tax incentives so that companies will invest," he said.

The government also pledged to spend an additional 7.5 trillion won to boost exports.

As a means to encourage domestic consumption, the ministry said it will offer tax cuts of up to 70 percent for the next six months on passenger car purchases.

The government's comprehensive support measures came on expectations that the country will experience a downturn in the latter half of the year.

While the trade dispute between Washington and Beijing has been somewhat alleviated with the two sides agreeing to resume talks, this is expected to be a temporary truce, and uncertainty prevails on the course and outcome of future negotiations.

Exports have been declining for seven consecutive months, and chip exports fell by 25.5 percent in June from the same month a year earlier. The price of semiconductors has fallen by 33.2 percent.

In addition, conditions could worsen when Japan's export sanctions on semiconductor components goes into effect; but this was not taken into account in the ministry's forecast and policies for the latter half.

Still too optimistic

The government's lowered growth forecast, however, still appears to be too optimistic according to global organizations. The forecast is based on the premise that a supplementary budget of 6.7 trillion won ($5.6 billion) is implemented.

In June, Fitch lowered its forecast for Korea to 2 percent, from 2.5 percent. Goldman Sachs also revised its outlook to 2.1 percent from 2.3 percent, while Nomura put out a forecast of 1.8 percent.

"It seems unlikely the government's growth forecast will be achieved," said Yun Chang-hyun, a professor at the University of Seoul.

"Considering the economy contracted in the first quarter from a quarter earlier, the trade conflict between the U.S. and China, and Japan's sanctions plan, I believe the economy will grow by a little over or below 2 percent."

In the first quarter, the country's GDP grew 1.7 percent from the same period a year earlier, but contracted by 0.4 percent compared to the fourth quarter of 2018, its worst performance in 41 quarters.

Sung Tae-yoon, an economist at Yonsei University, said "If it weren't for the extra budget, the growth rate would probably be a little over 2 percent."

Regarding the measures, Yun said, "These can only have a limited effect. If investment could be increased simply by providing tax incentives, the problem would not have arisen. The problem is the government's rigid labor policies, including the 52-hour workweek."

Sung echoed this view. "Weak investment is due to increased labor costs. It is questionable whether tax incentives will be able to cancel out the increased labor costs, as the incentives will be temporary."