The Ministry of Economy and Finance is painting a rosy outlook for the national economy. “There have been signs of a gradual economic recovery,” the ministry said in a report released on Friday. That assessment is even more positive than a previous one that said, “The economic downturn trend has been slowing.” This time, the word “recovery’’ was used. As the ministry put it, the nation’s manufacturing sector and exports have begun to show signs of a rebound, boosted by the recent rally in the semiconductor industry. The service sector has also shown a robust trend.
Despite such positive prospects, however, it appears premature to claim that the economy has begun a full-fledged recovery. The current upturn can be just a cyclical expansion. And the recovery is too slight for businesses and households to feel the effect. The Korea Development Institute forecast the nation will register an economic growth rate of 1.4 percent this year and 2.2 percent in 2024, revising down its previous outlook by 0.1 percentage point.
Should the current situation continue, the nation will likely suffer from a protracted economic slowdown as seen in the case of Japan. Earlier, the Organization for Economic Cooperation and Development (OECD) notched down Korea’s projected growth rate to 1.7 percent for 2024 and to the zero point range in 2033. Now it is high time for the Yoon Suk Yeol administration and businesses alike to double down on efforts to nurture medium and long-term growth momentum.
On a related note, the International Monetary Fund (IMF) released an annual report on Friday, recommending that Korea maintain high interest rates for a considerably long period. The organization forecast Korea’s consumer prices to increase 3.6 percent this year, although it expected a 3.4 percent rise in October.
The IMF also said inflation will continue next year, reaching 2.4 percent compared to its previous estimate of 2.3 percent, in consideration of soaring oil prices, among other factors. This indicates the need for Korea to keep its monetary policy restrictive for a while. For the Yoon government, curbing commodity prices has been a tough task. The steady rise in the prices of daily necessities, food and beverages has been intensifying inflationary pressures.
The IMF maintained its October forecast that Korea will achieve 1.4 percent and 2.2 percent growth rates for this year and 2024, respectively. It positively evaluated the Korean government’s efforts to secure fiscal soundness of the state budget, while calling for a strenuous drive toward that end.
Regarding the risks, it cited the growing debts of households and businesses coupled with the increasing project financing debts incurred by the non-bank sector. The IMF also underscored the need to push for corporate restructuring and reforms of national pension and labor market paired with the much-needed restrictive monetary policy.
What is worrying in this context are the populist pledges being made by political parties to earn votes ahead of the general elections in April next year. For starters, the ruling People Power Party and the main opposition Democratic Party of Korea are pushing for the construction of a high-speed railway linking Daegu and Gwangju without even conducting crucial feasibility studies. The project requires a huge budget of more than 11 trillion won ($8.5 billion). For this, the rival parties are moving to legislate a special bill in the name of balanced regional development and reconciliation between the nation’s southeastern Gyeongsang and southwestern Jeolla provinces.
Yet, we cannot help but point out that such pork barreling will only fan inflationary pressure, thus undermining efforts to fortify the potential for economic growth. The Yoon administration should refrain from employing makeshift measures to revitalize the economy. Instead, it should press for reforms relentlessly in the three key areas — labor, education and pension.
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