By Choi Sung-jin
Will the Korean economy be able to attain growth rate in the 3-percent range this year? The government and central bank say “yes,” but the assessment from most, if not all, private think tanks, here and abroad, is “no.”
According to the Korea Center for International Finance, major investment banks of the world think it will be difficult for the Korean economy to grow 3 percent or more in 2016. Most of all, the nation’s exporters will experience difficulties amid China’s economic slowdown and uncertainties in other emerging economies, it said, based on forecasts compiled by these global IBs.
Nor are the outlooks for domestic consumption bright. The massive artificial boost of last year could result in a “consumption precipice” this year. Corporate restructuring and stock market unrest are likely to put a damper on the confidence of businesses and households, leading to sluggish growth in the first quarter.
The government and the Bank of Korea will be forced to readjust their growth targets down to 2.6-2.8 percent eventually, the foreign banks said. Most of the local private economists hold similar opinions, with their growth forecasts this year not exceeding 3 percent.
During a recent confirmation hearing, new economic deputy premier, Yoo Il-ho, said that he thinks attaining 3-percent growth would be possible “without formulating an extra budget.” The BOK has recently lowered its growth projection from 3.2 percent to 3.0 percent, sticking to the number “3.” President Park Geun-hye, in her New Year address, also cited the 3.0-3.2 percent growth target by quoting research institutions.
The government’s adherence is more symbolic than substantive, analysts said, because once the economy enters into a 2-percent growth pattern, it will discourage economic players, pulling the actual growth rate further down.
If the government pushes ahead with hitting the 3-percent goal, the central bank will have to lower its benchmark interest rate once or twice, because that is the only means left to bolster the economy now that fiscal spending has reached its limits. Relatively stable inflation, which hovers below the BOK-set target of 2 percent, will provide additional excuses for interest rate cuts on two occasions, possibly in March and sometime during the second quarter, some investment banks say.
Some are more cautious than others about the possibility of interest rate cuts, which they say will trigger another exodus of foreign funds. “Any reduction of interest rates will be made in ways not to cause massive outflows of foreign investment,” the finance center said quoting a Swiss bank.