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High Price, High Growth Policies to Be Changed with Korea becoming Advanced Economy
Economic Forecast
High Price, High Growth Policies to Be Changed with Korea becoming Advanced Economy
  • By matthew
  • November 21, 2013, 05:44
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On November 19, the won-to-dollar exchange rate in the foreign market closed at 1,056.40 won, which is 1.50 won less than the previous day.
On November 19, the won-to-dollar exchange rate in the foreign market closed at 1,056.40 won, which is 1.50 won less than the previous day.

 

The fact that KDI, a national research and development institute, requested that the government respond to the economy by maintaining an alleviating monetary policy means that our economy still has unstable factors.

In the “2013 Second Half Annual Economy Forecast” released on November 19, KDI pointed out that the decreasing profitability in small and medium-sized businesses, household debts, and the US reduction of quantitative easing and its side effects as the major causes of structural instability. 

In addition, it warned that the economy may enter the low growth and low price generation like other advanced nations, so that Korea needs to focus on maintaining financial integrity. It may be possible to support the economy by releasing finances as of now, but continuing this way will lead to troubles around the country. 

KDI’s lead economist, Cho Dong-cheol, said, “We should pursue policies that can respond to the economy at the moment, but starting mid next year, we should turn our attention to financial integrity by reviewing the budget.”

Growth Rate Falling Behind Potential Growth Rate

As KDI advised to maintain monetary policy, it expected next year’s total demand pressure to remain negative. This means that the actual GDP is behind the potential GDP. In fact, KDI submitted a potential growth rate of 3.7% for next year, which is 0.3% less than what the government saw. If so, Korea will be in its fourth consecutive year in which its actual GDP falls behind the potential GDP.

To pull up the growth rate, businesses need to expand investments and hire more to increase expenses. But this kind of good circulation is not easy in the current situation. 

In the case of capital investments, due to the base effect reducing this year’s by 2.5%, the numbers are expected to increase to 8.4% by next year. However, for building investments, which are another side to total fixed investments, it will drop from this year’s 7.1% growth to next year’s 2.9%. In other words, it will be difficult to expect things to improve in terms of investment. 

Analysis also shows that public consumption will not show any dramatic recovery. Public consumption grew 2.0% this year, and is expected to grow 3.6% next year, which is still not very high.

In the employment market, the improvement rates are minimal as well. This year’s employment rate of 3.2% is expected to drop 0.1% to 3.1% next year. Although there was an increase of 400K in the number of newly-employed people, there is criticism that the quality is worsening with the employment of people in their 50s continuing to rise, while people in the age group of 20-29 are still unemployed. 

Exports will continue to improve. Next year’s exports are expected to be around US$592.6 billion, which will break this year’s record of US$568.7 billion. KDI anticipates the exchange rate to remain around the current range, from 1,050 to 1,060 won per dollar. The won will continue to grow strong with the surplus of product balances, but the appreciation of won currency is not necessarily high. 

KDI suggested preparing for the low price, low growth generation. If business investments and public consumption do not recover, this low growth rate will stay. Then Korea will become an advanced nation’s economy with a very low level of inflation, while all of the current policies are based on high price, high growth goals.