Korea’s Government Takes More Bullish View on Growth Than BOK
South Korea raised its economic forecast for this year by a wide margin after factoring in expectations for record exports and a rebound in consumption supported by rising vaccination levels and another extra budget.
The finance ministry says it expects gross domestic product to grow 4.2% this year, a full percentage point higher than its previous projection at the end of last year. Inflation will probably reach 1.8%, the ministry added in its twice-a-year outlook, up from its earlier view of 1.1%.
The latest forecasts are now more optimistic than the Bank of Korea’s most recent projections with the anticipated boost from the additional spending. The government wants to keep fiscal taps open to support sectors that may fall behind in the rebound, while the central bank is talking of normalizing policy.
The differences continue beyond the headline figures, too. The government sees employment rising by 250,000 this year, while the BOK forecasts just over half that increase. The ministry and the central bank’s inflation forecasts are the same.
Finance minister Hong Nam-Ki said he saw no reason why the government and the central bank always had to move in tandem.
Speaking at a briefing after the report was released, Hong said the central bank may be considering a rate increase due to “a financial imbalance that’s been accumulated in the course of recovering from the coronavirus,” as well as one-sided money flows.
The economy already surpassed its pre-pandemic level earlier this year as exports jumped amid a reopening of major economies and fueled investment at home.
While that has given the central bank enough confidence to consider pulling away from crisis measures, the government is looking to ensure the recovery reaches across the economy.
The government took note of the growth trajectory -- or average annual growth rates -- which remain below those seen before the pandemic. Growth and inflation are expected to slow to 3% and 1.4%, respectively, in 2022, the ministry said.
That would put the average growth rate for 2020-2022 at 2.1%, below the 2.8% of 2017-2019, the statement showed.
The government expects exports to jump 18.5% this year to an annual record of $607.5 billion. The pace of gains will ease after peaking in the current quarter, it said. Consumption will also recover, though it will continue to trail pre-pandemic levels with a gain of 2.8% as international travel remains limited.
Read More: Korea Plans One of Largest Extra Budgets Since Pandemic Hit
The economy would get a further boost if the extra budget under draft by the government is approved. Hong said last week it would likely exceed 30 trillion won ($26.5 billion), to make it one of the country’s biggest stimulus packages since the pandemic hit. The proposal will be submitted to the parliament in early July.
The government aims to use the extra funds to facilitate a consumption recovery, including issuing various discount coupons and offering cashback on credit card spending. It also plans to create more than 150,000 jobs, and extend employment benefits to tourism and other services sectors that are still struggling.
“The government will try to ensure that consumption capacity accumulated during the pandemic is unleashed toward sectors that have suffered the most from the virus,” Vice Finance Minister Lee Eog-weon told reporters before the release.
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