The Organization for Economic Cooperation and Development (OECD) has revised its 2017 growth forecast for the Korean economy downward to 2.6 percent. In June, the OECD estimated Korea’s growth at 3.0 percent.
By contrast, the Paris-based organization raised its growth projection for the world economy to 3.3 percent from 3.2 percent for 2017, boosted by fiscal expansion in major countries and improvements in raw materials prices. It raised its growth forecasts for major countries. U.S. economic growth, in particular, is forecast to rise from 1.9 percent to 2.3 percent thanks to President-elect Donald Trump’s pledge to boost infrastructure spending.
Negative factors for cutting Korea’s growth cited by the OECD include the delayed recovery of global trade, political uncertainty arising from the Choi Soon-sil scandal and the aftermath of the Galaxy Note 7 explosions. Most notable was that Korea’s plan to tighten government spending would drag down its growth next year.
The OECD expected Korea’s growth of fiscal spending to fall from 3.8 percent this year to 2.8 percent in 2017. That’s the result of the government’s fiscal austerity for next year in fear of deteriorating fiscal soundness. But a sharp cut in government spending would inevitably result in lower economic growth at a time when domestic demand is still in the doldrums.
Of course, fiscal health cannot be overemphasized. But whether the government’s overblown indulgence in fiscal soundness is right is uncertain, given that the nation has been mired in a low-growth trap for years amid unfavorable economic conditions at home and abroad.
In its announcement about the macroeconomic management plan for the second half of 2016 in June, the finance ministry decided not to issue state bonds in its retrenchment efforts. But this measure partly caused the nation’s third-quarter growth to drop to 0.7 percent, and the outlook for the fourth quarter is only bleaker.
Korea still boasts strong fiscal health, with its national debt-to-GDP ratio remaining at about 40 percent. The OECD recommended that the Korean government adopt expansionary macroeconomic policies while pursuing structural reforms, especially in labor. Being too conservative in government spending does more harm than good to the economy.