By Cho Si-young, Chun Jung-hong, and Lee Eun-joo
The International Monetary Fund (IMF) on Tuesday raised its growth outlook for South Korea’s economy this year to 3.2 percent, citing continued growth momentum in the country after a strong recovery in the first nine months of this year, and recommended swift structural reforms, more expansionary fiscal policy along with accommodative monetary policy to sustain the growth.
“Korea’s near-term outlook is improving despite elevated geopolitical tensions,” Tarhan Feyzioglu, who has led an IMF staff team to evaluate Asia’s fourth largest economy between Nov. 1 and 14, said in a statement for the team’s preliminary findings issued on Tuesday. “Growth is picking up this year, led by a strong expansion in investment, especially in the IT and construction sectors. Export growth strengthened thanks to improving external conditions and high global demand for semiconductors.”
The IMF’s latest revision of Korea’s gross domestic product (GDP) outlook in 2017 to 3.2 percent comes a month after it upgraded the forecast to 3.0 percent in its World Economic Outlook report in October, up 0.3 percentage point from its previous projection in April. The latest upgrade is also higher than the Korean government and the central bank’s estimate for this year’s growth at 3.0 percent.
The agency also retained its previous projection for the Korean economic growth rate in 2018 at 3.0 percent on expectations for a strong growth in the country’s exports and private consumption amid the continued cyclical recovery, said Feyzioglu. In particular, private consumption growth is expected to benefit from “the large minimum wage increase and from policies supporting employment and social spending,” he added.
President Moon Jae-in and the ruling Democratic Party tout wage-led growth through increases in minimum wages and job securities as means to stimulate economic growth.
But citing the dip in the country’s potential growth rate below 3 percent from the 7 percent range in the early 1990s, the IMF recommended the country take advantage of the current recovery to speed up structural reforms, a must to ease polarization and inequality in the country.
“Structural headwinds hinder a return to strong and sustainable long-term growth,” Feyzioglu said in the statement. “The priority should be to boost employment and productivity growth. This would require reforms to address rigidities in product and labor market” while focusing on supporting innovation and easing regulations.
The IMF also called for more expansionary fiscal policy “through higher expenditures on social policies and structural reforms” to support the growth. “Korea has ample fiscal space to aim for a zero structural balance in the short and medium run without a risk to debt sustainability,” according to the statement.
It also suggested the Bank of Korea (BOK) to maintain its accommodative monetary policy citing the country’s still weak inflationary pressure and negative output gap. The comment comes at a time when the central bank is widely expected to raise the country’s benchmark interest rate kept unchanged at the record-low of 1.25 percent since June last year.
The BOK recently raised market expectations for delivering its first rate hike in more than six years in its Nov. 30 meeting, its last rate-deciding meeting for this year, by raising this year’s growth estimate to 3.0 percent.
Overall, the IMF welcomes the new government’s focus on supporting innovation and fostering productivity growth, Feyzioglu said, adding that the agency expects the country’s efforts to reduce regulatory burden further to the level of the OECD frontier within 10 years could raise annual potential growth by more than 0.3 percentage point over the cited period.
The six-member IMF delegation has stayed in Seoul for 14 days for a regular review of the Korean economy, meeting officials from the Ministry of Strategy and Finance, Ministry of Employment and Labor, Korea Fair Trade Commission, Financial Services Commission, BOK, Financial Supervisory Service and Korea Development Institute. The delegates will prepare a final report based on their preliminary findings from this visit and present it to the IMF’s Executive Board for discussion and decision, it said in the statement on Tuesday.