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(News Focus) Full-fledged recovery in domestic demand not in offing

All News 16:00 June 28, 2021

By Kim Soo-yeon

SEOUL, June 28 (Yonhap) -- South Korea on Monday unveiled a set of measures to boost domestic demand in the second half with massive fiscal spending, but experts said a meaningful recovery in private spending is not feasible amid uncertainty over the COVID-19 pandemic.

The finance ministry announced its second-half economic policy plan, with the goal of the country pulling off a "complete" economic recovery. To this end, the government will focus on propping up domestic demand and reducing deepening income gaps, known as a K-shaped recovery.

The South Korean economy has been on a recovery track, led by robust exports of chips and autos and reviving domestic demand.

This photo, taken on June 24, 2021, shows a sign about the launch of a state-led nationwide festival at Lotte Department Store in central Seoul. (Yonhap)

Asia's fourth-largest economy is forecast to expand 4.2 percent this year, following a 0.9 percent contraction last year, according to the ministry's latest estimate.

After a yearlong slump caused by the pandemic, domestic demand has improved in recent months amid an economic recovery and the vaccine rollout.

Private spending grew 1.2 percent in the first quarter from three months earlier, rebounding from a 1.3 percent on-quarter contraction in the fourth quarter of last year, according to the Bank of Korea (BOK).

But domestic demand remains weak compared with pre-pandemic levels as in-person service segments, such as hospitality and retailers, have been suffering job losses and a fall in sales.

To spur consumption, the government plans to provide cash-back rewards for credit card spending. The three-month program will allow people to receive such benefits up to 300,000 won (US$265) per person.

The country will also resume a discount coupon program designed to boost consumption on accommodations, tourism, dining and arts. It will also launch a similar coupon scheme for watching movies and use of railway and bus services.

Despite the government's efforts, experts voiced doubts over whether the measures will yield the intended effect of bolstering domestic demand as global concerns are growing over highly contagious COVID-19 variants.

"It may be difficult for the country to expect a full-fledged recovery with fiscal spending as uncertainty lingers over how the pandemic will play out," Joo Won, chief economist at the Hyundai Research Institute, said.

The fast spread of the Delta variant, which originated from India, could complicate health authorities' fight against COVID-19 later this year, potentially sapping the economic recovery.

This photo, taken on June 25, 2021, shows citizens shopping for clothes at a department store in southern Seoul. (Yonhap)

Kim Yoo-mee, an economist at Kiwoom Securities Corp., said the recovery of domestic demand is expected to be slow as people in the low-income bracket are facing tough employment situations and have not enough room to increase consumption due to a fall in income.

Critics said the cash-back rewards scheme could only benefit high-income earners, leaving low-income people and those with low creditworthiness shunned from such support.

"More targeted support for low-and middle-income households will be needed to spur spending," Joo said.

The country reported job additions for the third straight month in May, but job recovery remains uneven across sectors and age. The service industry and those in their 30s and 40s are still suffering from job losses.

The government is planning this year's second extra budget, estimated at about 30 trillion won, as it seeks to support vulnerable people hit hard by the pandemic and to prop up domestic demand.

South Korea drew up an extra budget of 14.9 trillion won in March to finance the 20.7 trillion-won relief aid for smaller merchants and the self-employed.

But some experts voiced concerns that the creation of another large supplementary budget is not in sync with the central bank's move toward monetary tightening.

This computerized image shows the creation of this year's second extra budget in response to the COVID-19 pandemic. (Yonhap)

BOK Lee Ju-yeol said last week his bank is ready to raise the key interest rate "within this year," stressing the need to orderly normalize its monetary policy amid the accelerating economic recovery.

In May, the BOK froze its policy rate at a record low of 0.5 percent. The central bank slashed the base rate by a combined 0.75 percentage point between March and May 2020 to bolster the pandemic-hit economy.

The government dismissed the view that the fiscal and monetary policies go in opposite directions.

"This is rather a policy mix under which we seek to support vulnerable people with the fiscal policy, and the monetary policy focuses on easing financial imbalances," First Vice Finance Minister Lee Eog-weon told a press briefing.

sooyeon@yna.co.kr
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