Can economy grow 3% in 2018?

To commemorate its 67th anniversary, The Korea Times surveyed 20 experts on their outlook for the Korean economy in 2018 and evaluation of the Moon Jae-in administration’s economic policies. The survey is covered on this page and the next two pages. — ED.

A few years ago, economic growth of 3 percent became a criterion to evaluate the government’s economic policies.

With the target becoming harder to achieve as the economy matures, economists are mostly skeptical about the Moon Jae-in administration attaining the number next year.

Most of all, negative external factors will weigh on the economy.

“Despite stable growth of key industries like semiconductors, 3 percent economic growth is unlikely to be achieved when considering external factors like North Korea’s nuclear threats and a key rate hike which is scheduled for next year,” said Lee Han-kook, representative director of Jones Lang LaSalle Korea.

While exports pulled up the economy this year, Prof. Oh Jung-geun of Konkuk University pointed out that trade protectionism in the United States and economic retaliation by China will work adversely on exports.

Sun Dae-in, economist and head of SD Inomics, was also negative about the 3 percent rate.

“Among export items, semiconductors rebounded due to their cyclic nature. However, the chip market is facing uncertainties next year,” he said.

Woo Seok-jin, a professor at Myongji University, said the economy might grow 3 percent if external conditions turn positive.

“External factors matter for Korea’s economic growth. If relations with China improve after the Pyeong Chang Olympics and economic conditions improve in the United States following tax cuts, the Korean economy will also see growth,” he said. Woo cited fiscal spending as another key factor.

“If the government maintains an expansionary fiscal expenditure mode, the 3 percent target could be attained.”

Waning investment is another pressure on the economy. LG Economic Research Institute expects the economy to grow 2.5 percent next year as growth momentum has been weakening.

“Investment takes an especially huge part in Korea’s economic growth. It will slow down next year as construction investment starts to decrease and facility investment continues to be concentrated only on semiconductors,” the institute noted in a report.

Unlike previous governments, the Moon administration is vowing not to resort to the real estate market to pump up the economy. The administration also plans to slash the SOC budget for next year by more than 20 percent compared with this year.

Though the shift from strategies resorting to real estate bubbles is a positive change, it means the government will lose a tool for pulling up economic growth.

The LG Economic Research Institute expects construction investment will drop next year compared to this year on a slowdown of residential and commercial construction coupled with decreasing SOC construction.

Kim Young-ick, a professor at Sogang University, also pointed to sluggish construction.

“Amid sluggish private consumption, a contraction in construction investment will be a major cause of the falling economic growth,” Kim said, expecting the economy to grow around 2.7 percent.

The decreasing wealth effect due to the cooling off of the real estate market will also likely hamper consumption, according to Hyundai Research Institute.

Controversy over income-led growth policy

Economists expect consumption to lead growth instead of investment. However, they have differing views on the Moon administration’s income-led growth strategy which seeks economic growth by enabling households with more income to spend.

“Consumption will start to lead growth, as the propensity to consume will stop sliding and policies such as the minimum wage hike and public sector job creation take effect,” the LG Economic Research Institute notes in the report.

The institute is positive about the income-led growth policy.

“Though the minimum wage hike can have a negative impact on businesses and the self-employed, income-led growth will work positively on economic growth when considering the effect of expansionary fiscal spending.”

It explained that increasing labor income will expand consumption, with more income distribution to lower-income households also working positively since they have a higher propensity to consume.

Despite the recovery in consumption, the growth rate will stand at 2.5 percent as investment contributes less to economic growth, according to the institute.

Some economists, meanwhile, expect the income-led growth policy to hamper economic growth.

“As the Moon administration is pushing its income-led growth policy, it is hampering businesses from making domestic investments. Investments overseas, meanwhile, have doubled from last year,” Oh said.

Some economists say sticking to a certain number in economic growth is meaningless.

“Whether the economy grows 3 percent or 2.8 percent is meaningless for most people. The economic growth rate can go up with the government increasing the budget and exports. However, the rising economic growth rate this year following exports of semiconductors and facility investment isn’t making a meaningful contribution to household income. Consumer sentiment is weakening,” said Konkuk University professor Choi Pae-kun, stressing what matters is the quality of growth, not quantity.

He said if the economy grows 3 percent next year, it will be proof of the income-led growth strategy’s success. For this, external factors such as geopolitical risks should not be aggravated, he added.

The Hyundai Research Institute advised in a report that the economy should recover dynamism for sustainable growth.

“Instead of being obsessed with shortsighted economic growth targets, the government had better focus on controlling risks such as the imbalance between internal and external demand and slowdown of growth potential. It needs a long-term strategy that solves the structural weaknesses of the economy.”

It also sees income-led growth as a kind of experiment.

“To prepare for the failure of the experimental policy, the government should continue setting up the foundations for corporate investment which has been a key player in job creation.”