South Korea’s economic policymakers have dismissed as improbable the forecast made last week by Moody’s Investors Service that real gross domestic product growth in the country would be only slightly above 2 percent in both 2019 and 2020.
The global credit rating agency revised down its outlook for the nation’s economic growth for 2019 and 2020 to 2.1 percent and 2.2 percent from its November predictions of 2.3 percent and 2.5 percent, respectively.
Officials at the Ministry of Economy and Finance describe the outlook as “far from the consensus estimate” by various institutions, saying there is little chance that Korea’s growth rate will dip to 2.1 percent this year. The ministry has predicted that the country’s economy will expand around 2.6 percent to 2.7 percent in 2019. The growth rate dropped to 2.7 percent last year, the lowest level since 2012, from a solid 3.1 percent in the preceding year.
Days after the release of Moody’s latest report, the Organization for Economic Cooperation and Development downgraded its growth prospect for Korea’s economy this year to 2.6 percent from its previous forecast of 2.8 percent in November. It also revised down its forecast for the country’s growth next year from 2.9 percent to 2.6 percent.
Policymakers may not need to be too sensitive to negative changes in growth estimates from various institutions at home and abroad, which may or may not prove accurate. But they do need to take a close look at the reasons cited for such downward revisions.
Moody’s said the country’s economic momentum has been hurt by the weakening of the investment cycle and the deceleration in global trade. It added that subdued demand for intermediate products from China, especially semiconductors, has had an adverse impact on exports as well as on the investment outlook.
The rating agency also noted that a minimum-wage increase, which is a key part of the income-led growth policy pursued by President Moon Jae-in’s administration, is largely blamed for Korea’s worsening employment. The minimum wage applied to all workplaces around the country jumped by double digits in 2018 and 2019.
Small businesses view the hikes as a “challenge to their competitiveness,” Moody’s said.
In short, its downward revision of the country’s growth outlook can be viewed as the result of a misguided policy being implemented amid deteriorating macroeconomic conditions at home and abroad.
Certainly, the external economic environment is a variable that cannot be controlled by policymakers. But it is their responsibility to take proper policy steps to improve domestic conditions and minimize the negative impact from the outside.
Since the launch of the Moon administration in May 2017, a string of anti-business measures has combined with worries about the aggravating external environment to push local companies to shelve investment and cut employment.
According to recent data from the Bank of Korea, facility investment in the country decreased 1.6 percent from a year earlier in 2018.
Korea’s unemployment rate reached 3.8 percent last year, a record high since the 4 percent tallied in 2001. Only 97,000 jobs were added to payrolls in 2018, the lowest figure since 2009.
A continuous decline in outbound shipments has deepened concerns that Asia’s fourth-largest economy will be trapped in a long-term slowdown. Korea’s exports, which account for about half of its GDP, fell 11.1 percent in February from a year earlier, marking the third consecutive monthly decrease.
Moon and his aides have recently been emphasizing the need to lift regulatory restrictions and nurture new industries to spur growth and create more jobs. Their rhetoric, however, has yet to translate into concrete actions.
Above all, the Moon administration should discard the ill-conceived income-led growth policy, which has worsened unemployment and made poor people poorer while undermining corporate competitiveness.
The gloomy economic outlook overshadowed the BOK’s report last week that showed the country’s per capita gross national income surpassed the $30,000 mark for the first time last year.
The accomplishment made Korea the seventh nation in the world to join what is called the “30-50 club” of economic powerhouses with per capita income exceeding $30,000 and populations over 50 million. Still, it is far from guaranteed the country will retain the status if its growth rate continues to head downward.