Apparently buoyed by positive figures released by the Bank of Korea on Tuesday, President Moon Jae-in said in his parliamentary speech on the proposed budget for 2021 the following day that it was time for a full-fledged push to revitalize the economy.
He stressed the need to continue an expansionary fiscal policy to help achieve a full economic recovery and a win in the fight against the coronavirus pandemic, which he said the country should catch at the same time without fail. His administration has drawn up a record 555.8 trillion-won budget ($489.6 billion) for next year, up 8.5 percent from this year.
The latest data from the central bank showed South Korea’s economy returned to modest growth in the third quarter of this year after two consecutive quarterly contractions.
In the July-September period, the nation’s real gross domestic product grew 1.9 percent from the previous quarter mainly on the back of a rebound in exports. Asia’s fourth-largest economy recorded an on-quarter contraction of 1.3 percent in the first quarter and 3.2 percent in the following three months.
In the third quarter, Korea saw its outbound shipments increase 15.6 percent from three months earlier, with facility investment expanding 6.7 percent. But private consumption remained weak, down 0.1 percent from the previous quarter.
Shortly after the release of the BOK data, Finance Minister Hong Nam-ki, who doubles as deputy prime minister for economic affairs, said the country’s economy has entered a “trajectory of recovery.”
He expected the economy to continue to expand in the fourth quarter, pledging to take measures to help boost domestic spending down the road.
Given the actual economic conditions faced by the country, President Moon and his administration’s top economic policymaker seem somewhat hasty in painting a rosy picture of the economy.
As noted by experts, the country’s improved economic performance in the third quarter is due largely to the low base effect arising from a steep decline in GDP and exports in the previous quarter. Compared with a year earlier, Korea’s GDP and exports shrank 1.3 percent and 3.7 percent, respectively.
The country is likely to see its outbound shipments tumble again in the coming months, as a new wave of coronavirus infections has recently gripped the US and European nations, some of which are considering bringing back lockdown measures.
With its aggregate fiscal deficit close to 100 trillion won for the first eight months of this year, there will be a limit to bolstering domestic consumption with government expenditure.
In August, the BOK forecast that the country’s economy would contract 1.3 percent this year. The better-than-expected growth in the third quarter seems to have given economic policymakers hope that the economy could contract less than had been predicted for the year. Still, there is the possibility of Korea’s economy showing a worse performance if external conditions deteriorate and domestic policy tools remain limited and ineffective.
Even if the economy returns to the pre-pandemic growth level next year, it cannot be considered to have fully recovered.
Korea’s growth rate hovered below 2 percent for two consecutive years in 2018 and 2019 for the first time since the country began compiling GDP data in 1954. The prolonged pandemic crisis since early this year has accelerated the economic downturn, which is attributable mainly to ill-conceived policies such as the income-led growth drive pursued by the Moon government since it assumed office in May 2017. Stricter regulatory measures imposed on companies have further sapped economic vitality, holding them back from increasing investment and employment.
The economy may be said to have fully recovered when its fundamentals are bolstered to push up growth rates above the level seen before Moon took office.
His government should now focus on reinvigorating corporate activities by lifting regulations and implementing business-friendly policies, if it wants to see a full economic recovery. A weakened economy would make it harder to reduce fiscal deficits and income inequality.
In his speech to the parliament Wednesday, Moon requested bipartisan support for the early passage of bills that he said would help promote a fair economy. The business community, however, expresses concerns that the legislation to revise the commercial law and fair trade law and enact a financial group supervision law would restrict managerial rights and dampen corporate activities.
Moon needs to think about the bills opposed by companies if he truly believes it’s time for a full-scale push to revive the economy.