Korea grapples with weak growth momentum, stubborn inflation
President Yoon Suk Yeol delivers a congratulatory speech during a ceremony to open the Busan New Port's seventh pier in Changwon, South Gyeongsang Province, in this photo provided by presidential office, April 5. Yonhap
With President Yoon Suk Yeol set to begin his third year in office, Korea has presented sluggish economic growth amid stubborn inflation unseen in decades, experts said Wednesday, calling for a clear, detailed policy mix to spur growth while maintaining its restrictive fiscal stance and structural reforms.
Growth had started to slow in mid-2022 amid a global economic slowdown and sagging domestic demand due mainly to the normalization of fiscal policy and monetary tightening following years of expansionary fiscal spending amid the COVID-19 pandemic.
The country's gross domestic product advanced 4.3 percent from the second quarter of 2022, when Yoon took office, through the first quarter of this year, according to the data by the Bank of Korea (BOK) and Statistics Korea.
The performance was nearly on a par with the country's estimated potential growth rate of around 2 percent, which means the maximum economic growth that can be achieved without triggering inflationary pressure.
In yearly terms, the economy expanded 1.4 percent in 2023, slowing from the previous year's 2.6 percent gain and the 4.1 percent advance in 2021.
Except for 2020 when the country was hit by the pandemic, last year's growth marked the lowest level since 2009 when the economy expanded a mere 0.8 percent in the aftermath of the global financial crisis.
The economy, however, has been recovering gradually since late last year on rising exports. During the January-March period, the economy advanced 1.3 percent on-quarter, the fastest growth in more than two years, according to BOK data.
Sputtering growth over the past two years came along with high-flying inflation.
Customers shop at a supermarket in Seoul, April 22. Yonhap
Consumer prices, a key gauge of inflation, surged 6.7 percent last month compared with April 2022 amid the Russia-Ukraine war and other geopolitical uncertainties that had pushed up energy and commodity prices.
Prices jumped 5.3 percent in May 2022 to climb further to 6.3 percent in July 2022, the highest level since November 1998 when Korea was reeling from the Asian Financial Crisis.
In an effort to curb inflation and ease mounting burdens on the people, the Yoon government has devised various countermeasures, including extending fuel tax cuts, lowering import tariffs on fresh food and other major items, providing discount coupons and reforming the logistics structure of agricultural products, among other measures.
Inflationary pressure has been gradually easing after peaking in mid-2022, but the pace has been slower than expected and inflation remains around 3 percent, well above the government's target rate of 2 percent.
"Our projection for a 2.3 percent inflation level in the second half of this year was based on the premise that global oil prices stay around $80 per barrel," BOK Gov. Rhee Chang-yong told reporters last month. "We need to monitor the inflation situation to consider any pivot."
The BOK has kept its benchmark interest rate unchanged at 3.5 percent since January 2023. It froze the rate ten straight times, though the level is the highest since 2008.
Dubai crude, Korea's benchmark, rose to $89.17 per barrel on average in April from $78.85 in January, $80.88 in February and $84.18 in March, according to government data.
The Yoon government's other key economic policy goal was improving fiscal soundness, while pushing for deregulation and tax incentives for companies with the goal of promoting business activities, encouraging corporate investment and boosting growth.
"The government's efforts to support businesses have not drawn tangible results amid multiple headwinds at home and abroad," Joo Won, an expert at Hyundai Research Institute, said.
Law revision was needed to push for some of its stated goals, but it was far from easy with the opposition-controlled National Assembly, he added.
Others urge the government to come up with fundamental, detailed measures on how to prop up the economy while ensuring fiscal soundness.
"Though the government has reaffirmed its commitment to the restrictive fiscal stance, it is still unclear what it will do then with the funds saved. People will not be able to feel policy effects if there is not a clear policy direction," Cho Young-moo, a researcher from LG Business Research, said.
Political commentator Lee Jong-hun stressed the need for the Yoon government to sketch a longer-term vision for structural reform.
"Policy focus during the remaining term should be on how to better respond to the industrial transition amid the fast-changing global order and demographic changes. The government can achieve structural reform only through close communication with the opposition side," Lee added.
In the general elections in April, the main opposition Democratic Party of Korea retained a majority in the legislature, which could make steering major reform measures through the National Assembly more challenging. (Yonhap)