Auto tax, anti-graft law cast a chill over second-half recovery

By Choi Sung-jin

The Korean economy bounced back in the first half of the year with industrial production and consumption picking up and the decline of exports slowing to a single-digit rate.

In the second half of the year, however, various adverse factors abroad and cooling domestic demand are expected to put the brakes on the economic recovery, business watchers said Friday.

According to Korea Customs Service, the nation’s exports in the first 20 days of July are estimated to have fallen from a year ago to $24.6 billion. Considering that this July has two fewer working days than the same month last year, the year-on-year export decline will be a little steeper this July, it said.

However, if Korea, which recorded the smallest monthly export setback in June, manages to minimize the loss of overseas shipments in July, it can hope for a rebound in August and thereafter, the economic analysts said.

Minister of Planning and Finance Yoo Il-ho also took note of the possible recovery of exports in August. “I expect exports will be on the recovery track from August,” Yoo said meeting with reporters in Chengdu, China, before attending the G20 finance ministers’ meeting on June 23. “Exports are expected to increase, and imports will also grow compared to last year.”

In the first half of the year, exports dropped 9.9 percent from a year ago. The setback of exports that started in January 2015 continued for 18 consecutive months. The only consolation was the monthly export decline slowed to a 2.7 percent drop in June, the smallest in the past year.

While exporters are hardening the ground to get out of the longest slump ever, the situations for businesses aiming at the domestic market appear unfavorable in the latter half of the year, the analysts said.

Above all, the individual consumption tax cuts for automobile buyers expire in the latter half. In addition, the implementation of the tightest anticorruption law the nation has ever seen on Sept. 28 will likely cast a chill on private consumption, they said.

In June, vehicle sales surged 24.1 percent from a year earlier as consumers rushed to auto dealers to buy a car before the tax benefit disappears, improving the consumption indexes across the board. From July, however, the excise tax cut on specific items has gone, causing concerns about a “consumption cliff.”

A bigger worry for domestic distributors is the so-called Kim Young-ran act named for the former Supreme Court justice who drafted it.

“It is worrisome because the damages of the new law will likely be concentrated on some specific industries,” Yoo, also deputy premier for economics, said. “It will exert great influence not only on the economy but on the entire society.”

The nation’s top central banker agreed. “The new law has a much wider scope of application and far harsher penalties than previous laws, adversely affecting private consumption and certain industries in particular, in the course of its implementation and taking root in society,” said Lee Ju-yeol, Bank of Korea governor.

Another cause of concern is massive unemployment in the course of restructuring shipbuilding and other ailing industries.

The government submitted an 11 trillion-won ($9.8 billion) extra budget bill to the National Assembly to cushion the impact of these adverse factors but it is uncertain the parliament will pass the bill by the government-set deadline of Aug. 12.

“The executive and legislative branches have implemented the extra budget toward the end of the year so far, unable to spend it more effectively amid unclear fiscal priorities,” said Professor Ahn Dong-hyun of Seoul National University. “If the officials are to increase budget spending at all, they should advance its implementation and set a clear list of priorities for more effective use of taxpayer money.”