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| KDI fellow and Macroeconomic Analysis and Forecasting Director Jung Kyu-chul, right, and KDI associate fellow Cho Duk-sang give a press briefing at Sejong Government Complex, Tuesday. Courtesy of KDI |
KDI sharply lowers growth outlook to -1.1%, fiscal balance reports record-high deficit
By Lee Kyung-min
The economy is expected to bear the full brunt of the recent flare-up of COVID-19 infections, as evidenced by continued downward revisions regarding growth, compounded by deteriorating fiscal soundness following four extra budgets drawn up for emergency relief.
State-run think tanks, the central bank and financial institutes largely agree that the growth of Asia's fourth-largest economy will be blunted further by a sharper-than-expected downturn sustained by continued infections, for which there is no "silver bullet" unless a vaccine or treatment is developed for commercial use.
The recent escalation of drawn-out U.S.-China trade and political feuds will add downward pressure to the export-reliant economy, a reason why fiscal and monetary policies should remain expansionary while a tailored approach is needed to maximize the efficient allocation of the government resources.
Korea Development Institute (KDI), a state-run think tank, said Tuesday the economy will contract 1.1 percent in 2020, a sharp revision from 0.2 percent growth forecast in May. The figure for 2021 was also revised to 3.5 percent, down from 3.9 percent projected in May.
The rare revision came eight years after the eurozone crisis heightened the uncertainty of the global economy in 2012. Earlier revisions were made in 2008 and 2009 following the global financial crisis.
"The Korean economy is unlikely to see a V-shaped economic rebound," KDI fellow and Macroeconomic Analysis and Forecasting Director Jung Kyu-chul said during a press briefing at Sejong Government Complex.
If the economy contracts 1.1 percent this year followed by 3.5 percent growth next year, it will fail to maintain a level similar to the country's growth potential, a dreaded yet highly probable scenario given consumption will tighten, compounded by a reduction or loss of income. Exports will manage to report a surplus on the back of a stronger-than-expected goods account balance despite lingering woes on global trade conditions.
"Private consumption will slump 4.6 percent this year, further down from 2 percent drop forecast in May. We initially projected that it will jump 5.3 percent next year but revised to a limited 2.7 percent increase," he said.
The figures could require further downward revision given the KDI had assumed a scenario whereby the virus spread would be contained by September and that social distancing would not be raised to the highest Level 3.
"The country will grow far slower than expected this year and the next. Government policies should prioritize helping the virus-hit group of businesses and people, thereby preventing the breakdown of social and economic structures," he said.
The recommendation calling for expansionary fiscal and monetary policies comes amid the fourth extra budget bill of 7 trillion won ($5.9 billion) drafted to provide emergency relief to low-income earners, entailed by the government debt shooting up and the financial balance in a rapid deterioration.
Data from the Ministry of Economy and Finance showed Tuesday that the country's consolidated fiscal balance recorded a deficit of 75.6 trillion won in the January-July period, up 51.3 trillion won from a year earlier.
The fiscal balance, excluding four social funds, reported a 98.1 trillion-won deficit in the same period, up 49.9 trillion won from the year before.
The more accurate measurement of the country's fiscal soundness ― with the surplus-reporting funds factored out ― has hit a record-high deficit every month this year.
The January to July deficit is lower than the record high of 110.5 trillion won in the January to June period, but is still the highest January to July figure to date.
Total state debt stood at 781 trillion won as of July, up 16.9 trillion won from a month earlier due to the execution of the third extra budget bill that took effect July 3. Spending total was 356 trillion won, far greater than revenue total of 280.4 trillion won.
Of 308.8 trillion won budgeted for government ministries' and state-run organizations' projects, over two-thirds, or 221.4 trillion won has been executed.
