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(EDITORIAL from Korea Herald on Jan. 30)

All News 07:46 January 30, 2020

Ultimate challenge
: Efforts needed to bolster sagging growth potential beyond the impact of coronavirus

The potential fallout from the spread of the Wuhan coronavirus is threatening to further weigh on South Korea's sluggish economy, which grew at the slowest pace in a decade last year.

In 2019, the country saw its gross domestic product expand 2 percent on-year, the slowest since 2009, due to a simultaneous slump in exports, investment and consumption.

Government and central bank policymakers have said the economy was expected to rebound this year partly on the back of eased trade tensions between the US and China and a recovery in the global chip market. The Ministry of Economy and Finance and the Bank of Korea respectively forecast that the economy will expand 2.4 percent and 2.3 percent in 2020.

But the continuous spread of the deadly new virus, which originated in the Chinese city of Wuhan, might compound other downside risks and make it hard to achieve the growth target.

Many private-sector economists have already warned Korea's economic growth rate might fall far below 2 percent this year, noting the government's efforts to bolster the economy by expanding fiscal spending without regulatory, labor and structural reforms are reaching their limits.

A turnaround in Korea's exports could be delayed as the disease spreads across China to hurt its consumption and industrial activity. China is the largest importer of Korean goods, accounting for a quarter of Korea's exports in 2019.

Trade officials here expect the country's outbound shipments to rise 3 percent this year after recording a 10.3 percent on-year contraction last year. Asia's fourth-largest economy saw its exports decrease for the 13th consecutive month in December.

The local tourism sector is also set to be hit hard by the spread of the disease, which is sharply reducing the number of Chinese travelers to Korea. Chinese tourists account for the largest proportion of foreign visitors to the country.

Concerns over the outbreak in Korea, which has so far confirmed four cases of infection, could also further weaken domestic consumption. In 2019, private consumption in the country grew 1.9 percent, slowing from 2.8 percent a year earlier.

Mounting worries about the negative economic impact of the epidemic might prove to have been overstated, if the virus is brought under control within months and the Chinese government implements massive stimulus measures to shore up growth.

In the longer term, what should draw more attention than the extent to which the coronavirus will affect the economy is the continuous weakening of the country's growth potential.

According to a report released Tuesday by the Organization for Economic Cooperation and Development, Korea's potential economic growth rate for 2020 is estimated at 2.5 percent, down 0.2 percentage point from a year earlier. The rate is projected to decline further to 2.4 percent next year.

A potential growth rate refers to the maximum possible rate at which an economy can grow without triggering inflation.

Korea has seen the rate fall steadily over the past decade after it gained 0.1 percentage point from a year earlier to 3.9 percent in 2010. The rate dipped below 3 percent for the first time in history in 2018.

The Bank of Korea estimates the rate at 2.5-2.6 percent for 2019-2020.

The declining growth potential indicates Korea is being drawn into the trap of low growth amid a continuous decrease in its workforce and productivity.

Another indicator of ebbing economic vitality is the widening difference between the potential growth rate and the actual growth rate, known as the GDP gap.

The country's GDP gap of 0.7 percentage point in 2019, based on the IMF estimate of its growth potential, was the widest since 2012 when the figure stood at 1.4 percentage points.

Fiscal expansion under President Moon Jae-in's administration has done little to strengthen the economic fundamentals.

In 2019, fiscal expenditure jumped 6.5 percent on-year, contributing 1.5 percentage points to the 2 percent growth for the year with the private sector's contribution remaining a mere 0.5 percentage point.

The increase in fiscal spending since Moon took office in 2017 has been intended mainly to offset the side effects of ill-conceived policies and expand cash transfers rather than enhance the efficiency and competitiveness of the economy.

Facility investment decreased 8.1 percent from a year earlier in 2019 as the Moon administration adhered to its anti-corporate stance amid deteriorating business conditions at home and abroad.

Rising concerns about the economic fallout from the spreading epidemic should serve to make it accelerate structural, regulatory and labor reforms in order to encourage private firms to increase investment.

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