OECD revises up Korea's economic growth outlook

By Yoon Ja-young

The Organization for Economic Cooperation and Development (OECD) raised its 2017 economic growth outlook for Korea to 3.2 percent from 2.6 percent. It expects Korea to continue achieving a 3 percent economic growth rate next year on the rebound of international trade.

In the OECD Economic Outlook released Tuesday, it forecast the global economy to grow 3.6 percent this year and 3.7 percent next year. The organization releases the outlook twice a year.

While both developed and developing economies will enjoy a recovery on stimulus measures, favorable job market conditions, a rebound of investment and increasing global trade, there remain downside risks including trade protectionism, vulnerability in finance triggered by debt and negligible rises in wages, according to the OECD.

It expected the Korean economy to grow 3.2 percent this year, which is higher than its previous estimate of 2.6 percent. It also pulled up its outlook for the next year to 3 percent from 2.8 percent.

The OECD noted that exports have underpinned growth for Korea.

“Construction investment, the key driver of growth since 2015, is slowing but exports have picked up. The semiconductor industry has led Korea’s export recovery and accounted for three-quarters of its business investment during the first eight months of 2017.”

“The rebound in international trade and greater fiscal support are projected to sustain growth of output at around 3 percent through 2019, even though construction investment is projected to slow following tighter regulations on housing and mortgage lending,” it noted in the report.

It added that high household debt and weak employment growth continue to hold back private consumption.

“The continuing rise in household debt also remains a headwind to private consumption, which has lagged output growth each year since 2006.”

The OECD also said that the Moon Jae-in administration’s income-led growth strategy would succeed only when accompanied by higher productivity since the rising wage costs driven by a hike in the minimum wage could weaken Korea’s competitiveness.

“The government’s strategy of ‘income-led growth,’ driven by public employment, a sharp rise in the minimum wage and increased social spending, needs to be supported by reforms to raise productivity. Fiscal policy, which is increasingly focused on income redistribution, also needs to place greater emphasis on productivity,” it noted.

“Another downside risk is sluggish business investment following hikes in corporate taxes, higher wages that weaken the profitability of smaller firms and the uncertainty created by the government’s pledge to reform large conglomerates that play a key economic role.”

The organization also stressed controlling household debt.

“Household debt is high, at nearly 160 percent of disposable household income, and rising,” it added.

While noting that the strengthening of macro-prudential regulations and housing taxes and regulations have slowed mortgage lending, it added that measures to stabilize household debt should be “carefully calibrated to avoid a contraction in the housing market.”

The OECD stressed that the measures to put household debt on a downward trend are a “priority to promote inclusive growth, in part by addressing the high debt burden of older people, the self-employed and workers with low incomes.”