OPINION

[Editorial] Gloomy outlook

By Korea Herald

Preventing steep economic downturn needs more policy measures beyond rate cuts

  • Published : Jul 23, 2019 - 17:23
  • Updated : Jul 23, 2019 - 17:23

The country’s economic growth rate for the second quarter of the year, which will be unveiled by the Bank of Korea on Thursday, is estimated to be around 1 percent, according to analysts here.

Earlier, the central bank had forecast that Asia’s fourth-largest economy would expand 1.2 percent on-quarter during the April-June period. But a deepening slump in exports and investments has continued to weigh on the economy.

South Korea’s exports are expected to decline for the eighth consecutive month in July amid a prolonged trade dispute between the US and China.

Data released Monday by the Korea Customs Service showed that the country’s outbound shipments fell 13.6 percent from a year earlier in the first 20 days of the month.

Korea’s recent trade spat with Japan, which is connected to bilateral historical disputes, is further dimming the outlook for its exports. Many Korean tech firms remain vulnerable to Tokyo’s moves to tighten regulations on exports of key hi-tech materials and components to the country.

Aggravating external conditions have been coupled with the anti-corporate environment at home to push local companies to delay or cancel investment decisions.

BOK analysts project that facility investments in the country will shrink 5.5 percent in 2019 from a year earlier.

Reflecting increasing economic uncertainties at home and abroad, the central bank last week trimmed its growth outlook for the year to 2.2 percent from its earlier 2.5 percent forecast.

But major institutes have painted a gloomier picture of the Korean economy, with most foreign investment banks predicting the growth rate to fall below 2 percent.

If growth is stuck below 2 percent, the economy would face a horde of problems including job cuts, income reductions, increased debt and a tax revenue shortage.

Concerns about a steep economic downturn led the BOK to unexpectedly cut its benchmark interest rate by a quarter percentage point to 1.5 percent last week. The central bank has since signaled it will further reduce the rate to prop up the economy.

Economists expect the BOK to make two additional rate cuts over the coming year, pushing it down to a record low of 1 percent.

Basically, it is right to ease monetary policy in step with fiscal expansion to achieve a proper policy mix to bolster the economy.

In May, the government submitted a 6.7 trillion won ($5.68 billion) extra budget to the parliament, which has yet to deliberate on it.

But rate cuts and expanded fiscal expenditure cannot be expected to reinvigorate the economy without being accompanied by measures to encourage corporate investments.

BOK Gov. Lee Ju-yeol hit the right note last week when he said current economic woes were stemming from policy failures and structural factors as well as worsening external conditions.

The income-led growth initiative driven by President Moon Jae-in’s government over the past two years has put excessive burdens on companies, holding them back from increasing investments and employment.

Structural reforms have stalled, making it hard to enhance corporate competitiveness and labor productivity.

Deregulation should be accelerated and the labor market needs to be made less rigid to help induce companies to invest more in the country.

The government should take steps to ease safety and environmental protection regulations and implement the shorter workweek introduced last year in a more flexible manner.

It is also necessary to reduce tax burdens on companies by cutting corporate tax rates and raising tax deductions on research and development investments.

Fiscal expansion and monetary easing unaccompanied by structural and regulatory reforms could result in further hurting the economic fundamentals.

Caution is needed to prevent additional rate cuts from causing capital flight, currency instability, property price hikes and a rise in household debt.

President Moon said Monday his government will strengthen its push for innovative growth in the country’s manufacturing sector, especially by nurturing globally competitive startups, as part of a long-term response to Japan’s trade pressure. He noted that challenges from Japan’s export controls targeting Korean firms could result in opportunities for them.

If he believes so, he should first make a fundamental shift in his government’s policies that have placed restrictions on corporate activity instead of just calling for a “can-do” spirit.

Government officials have announced plans to allow companies involved in the localization of key materials and parts to receive tax benefits on R&D spending and to be exempted from the shorter workweek on a temporary basis.

Such measures should be applied to a wider scope of industrial sectors on a permanent basis.