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(News Focus) Uncertainties linger for S. Korean economy in 2014

All Headlines 09:29 January 05, 2014

By Koh Byung-joon

SEJONG, Jan. 5 (Yonhap) -- South Korea's economy seems to be improving from a protracted slump over the past year in part thanks to government-led stimulus measures, but its 2014 outlook still remains cloudy given many lingering uncertainties that could put a brake on its nascent recovery.

Since President Park Geun-hye took office in February last year, her economic team led by Finance Minister Hyun Oh-seok has taken diverse measures aimed at jump-starting the economy then faced with a slew of challenges from both home and abroad.

Falling exports, sluggish domestic demand and the U.S.' possible move to taper off its stimulus measures raised concerns that Asia's fourth-largest economy could slip into a long-haul low-growth track.

The government moved to turn things around by increasing its fiscal spending and easing regulation to boost corporate and consumer spending.

In April, the finance ministry drew up an extra budget worth 17.3 trillion won (US$16.4 billion) to spur economic growth by expanding fiscal spending, mostly on creating jobs and boosting domestic demand.

The budget was the largest amount after the government proposed 28.4 trillion won in an additional spending plan in 2009 when the country was suffering from the effects of the global financial crisis.

The ministry also unveiled a set of measures aimed at boosting sluggish corporate investment and the housing market last year amid worries that a protracted slump in business spending and anemic property market conditions could serve as a heavy drag on the overall economic recovery.

Such government-led stimulus efforts appeared to be paying off in recent months, with major indicators pointing to an improvement in many areas of the economy.

Exports are picking up, and South Korea continues to post current account surpluses. The labor market conditions are improving, with job creation accelerating in recent months.

The country's gross domestic product grew 1.1 percent in the third quarter from three months earlier. Compared with a year earlier, the economy grew 3.3 percent in the third quarter, quickening from a 2.3 percent on-year expansion three months earlier.

Experts attributed the improvement and the recently changed mood in economic conditions here in part to such government-led stimulus efforts.

"The government has worked to tackle the problem of youth unemployment and find new engines for economic stimulation over the past year, and that seems to be somewhat successful," said Song In-ho, a researcher at the state-run Korea Development Institute. "I can say that the government got off to a good start when it comes to its economic policy."

Kang Hyun-gu, an analyst at Hyundai Securities, echoed the view, saying that such stimulus measures helped to prevent the economic conditions from getting worse and paved the way for a sustained recovery going forward.

"Through the extra budget and property market stimulus measures, among other things, the government pushed to boost domestic demand, which started to show signs of recovery from the fourth quarter of last year," he said.

"Those measures helped prevent things from getting worse and laid the groundwork for an economic recovery," he added.

Confident that the global market will improve further and the export growth will accelerate, the government recently said that it will work hard this year to narrow the "gap" between the improving indicators and what ordinary people actually feel in their daily life by focusing on stimulating domestic demand.

"The economy is not about figures, but about life. We cannot say that the economy is actually recovering until the warmth starts to be felt by the working-class and middle-income people," Finance Minister Hyun Oh-seok told reporters at a press conference on Dec. 27.

"In 2013, we have built up the recovery momentum mostly through government-led efforts. In 2014, we will work hard to spread the momentum into the private sector in a way that could consolidate the overall growth mood of our economy," he added.

Things, however, might not be as favorable as the government expects.

There are worries that the U.S. decision to ease up its bond-purchasing program could destabilize the financial market here by causing capital outflows and that the Japanese yen's steep fall could make it hard to sell Korean goods in overseas markets where they have to compete with Japanese rivals.

The currency issue, in particular, could become a major issue as proven recently when the Japanese yen's steep decline against the won resulted in a tumble in the stock market.

Concerns are also growing that the Chinese economy might lose its growth momentum, which could end up reducing demand for Korean goods.

This could make it hard for the government to achieve its growth projection for this year.

Last month, the finance ministry predicted that the economy will grow 3.9 percent this year following 2.8 percent in 2013, as the rebounding global economy will present better market conditions for its exports.

It also said that it will focus its economic policy this year on bolstering corporate investment and consumer spending, while keeping its "expansionary" fiscal and monetary policy for the time being.

"Behind the government's push to boost domestic demand this year lies its confidence that it is sure about robust exports growth, expecting that European and the U.S. markets will improve," Kang of Hyundai Securities said.

"On the external front, however, exchange rates are a major issue. With the continued current account surplus, the yen continues to lose its ground, causing the already strong won to further appreciate. This could come as a risk factor by slowing our exports growth going forward," he added.

The protracted political impasse was also cited as a risk factor for the Korean economy, as seen last year, many of the stimulus policies getting dusted from the stalemate in the National Assembly.

The ruling and opposition parties had been locked in a fight for months over the state intelligence agency's alleged meddling in the 2012 presidential election, and major economy polices including tax revision and housing market stimulus bills were caught in the middle.

Some experts said that it could hurt people's confidence in the government's policy direction.

"Concern is that at a time when the government has to pursue many important policies aimed at improving the life of the people, boosting the economic momentum and generating jobs, it could lose public confidence in its policy due to such shaky legislative process," said Song In-ho of Korea Development Institute.


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