Organizations rush to cut Korea's growth outlook

By Lee Kyung-min

Local and international organizations rushed to downgrade their growth outlook for South Korea, Friday, due to weak consumer sentiment and intensified trade tension between the U.S. and China.

Their gloomy views have raised concerns that Asia's fourth-largest economy is falling into the trap of low growth similar to the one Japan experienced over the last two decades.

The Organization for Economic Cooperation and Development (OECD) and LG Economic Research Institute (LGERI) revised down the country's growth, while Fitch Ratings is likely to follow suit in the near future.

In its interim economic outlook released Thursday, the OECD expects the country will grow 2.7 percent this year, lower than its previous forecast of 3 percent made in May. It also cut its outlook for next year from 3 percent to 2.8 percent.

Similarly, LGERI projected that the country's growth will decrease from this year's 2.8 percent to 2.5 percent next year, much lower than the 2.8 percent estimate of the BOK in July.

Hyundai Research Institute and Korea Economic Research Institute are expected to publish their estimates with similar views this month and next month, respectively.

The grim outlook bodes ill for the country, fueling expectations that the Bank of Korea (BOK) will have to revise its projection in October, further down from July's 2.9 percent, an estimate it had already cut 0.1 percentage point from in its previous forecast. The BOK policy board will convene for rate decision meetings in October and November.

While the government expects consumer confidence will recover once the effects of income-led growth take effect, worsening economic data suggest otherwise, according to Lee Chae-woong, a professor emeritus of economics at Sungkyunkwan University.

“The state-set minimum hourly wage has increased to nearly 30 percent over the past two years, threatening small- and medium-sized business owners,” Lee said.

“Unlike the intended outcome of revitalizing the economy by increasing household income, the drive has resulted in job cuts leading to consumers further tightening their purse strings, hence, the sluggish economy.”

Next year's minimum wage is set at 8,350 won, up 10.9 percent from this year's 7,530 won, a 16.4 percent increase from 6,470 won last year.

The major determining factor in estimating the growth outlook is the ongoing trade dispute between the U.S. and China, according to a senior researcher at the Korea Institute of Finance (KIF).

“Political uncertainties stemming from U.S. politics is the single greatest factor of policy changes in the U.S. at this point,” said Song Min-kee at the macroeconomics research center at KIF.

“While we cannot project the outlook with certainty, a major change in the political landscape in America could influence future estimates following the U.S. mid-term elections in November in which President Donald Trump and his administration will face judgment. More estimates will be made in mid-October when the International Monetary Fund releases its quarterly world economic outlook.”