Two of the most renowned economic
research institutes in
Korea have recently modified
their economic forecasts for
2017. Led by the Bank of Korea (BOK),
which adjusted the country’s growth projection
from 2.5 percent to 2.6 percent for
2017, the Korea Development Institute
(KDI) has also upgraded it projection levels
from 2.4 percent to 2.6 percent. In a
span of just three to four months, both
institutions changed their views of the
2017 Korean economy and upgraded
growth rates by 0.1 to 0.2 percentage
points, making their forecasts identical at
2.6 percent. But despite this similar
action, the reasons behind their hike are
For the BOK, the prime reason for its projection growth comes from the rise of equipment investments. In the previous projection published in January 2017, the BOK expected equipment investments to grow by 2.5 percent. But in the April, it modified it to 6.3 percent, rendering an increase of 3.8 percentage points. Equipment investment, which takes up about 30 percent of the GDP, would have contributed to an increase of 1.14 percentage points in the GDP growth rate.
On the other hand, KDI’s revision of its economic forecast is mostly due to the export sector. Previously, KDI projected that exports would grow 1.5 percent for 2017, but now changed it to 4.9 percent— equivalent to almost 1.7 percentage points in the GDP growth rate. Therefore, despite the apparent similarity in raising the growth forecasts for 2017, the BOK underscores equipment investment while KDI stresses exports.
Equipment investment has been generally lackluster in 2016, showing negative growth rates at about –2.3 percent. So, a recent acceleration in this sector might have been a natural rebound from its decline in 2016. As
the average growth
rate of equipment investment fluctuated around 2 percent for the last six years, the
BOK’s forecast of a 6.3 percent increase
in 2017 seems somewhat astounding.
Exports, meanwhile, began improving from the middle of 2016 and finally ended the months-long streak of negative growth. In the first two months of 2017, export grew at 20 percent compared to the year before, and this trend is expected to continue.
But there are some issues that the Korean government should pay close attention to in order to accelerate export growth in the future. First, recent prices of semiconductors and petrochemical products have been declining, creating a strain on two of Korea’s most powerful export markets. Second, the yen has been depreciating since Brexit. Last June, it hit JPY 101 per dollar, rebounding back to JPY 116 by December. Although fluctuating early this year, it still remained above the JPY 110 mark, which is still 10 percent higher than last year. Third, the Korean won has been appreciating quickly from around KRW 1200 per dollar to KRW 1100. Fourth, retaliatory measures by China after the decision to deploy THAAD (Terminal High Altitude Area Defense) are casting a cloud over Korea’s export environment.
Considering these challenges, Korea’s growth engine should be sought after
in two areas: investment and consumption. Here, the expansionary fiscal policy of the central government should play a key role. On this note, the IMF and the US Treasury Department suggested that the Korean government should expand its fiscal policy function to encourage economic growth.
Taking this into mind, the Korean government should think about which fields to focus its fiscal expenditures on. The primary area of fiscal action could be on welfare expenditures, supporting the unemployed, the elderly or the disabled. It could also be spent on R&D to assist in the growth of new technologies and products. Other options include renovating old towns and villages, educating the youth and enhancing the competitiveness of industries through investments. With the new administration soon to take office, political leaders must find a consensus on which areas need fiscal action first.