Government Announces Economic Policy Directions for Second Half of 2020
Employment Numbers Expected to Remain Steady at Last Year's Level
Hong Nam-ki, Deputy Prime Minister and Minister of Economy and Finance (right), is delivering opening remarks at the '2020 Second Half Economic Policy Direction and 3rd Supplementary Budget Party-Government Meeting' held at the National Assembly in Yeouido, Seoul, on the 1st.
[Sejong=Asia Economy Reporter Kim Hyun-jung] Considering the impact of the novel coronavirus disease (COVID-19) crisis, the government has lowered its domestic gross domestic product (GDP) growth forecast for this year by 2.3 percentage points from the previous estimate to 0.1%. It explained that private consumption will serve as a pillar, preventing a plunge into negative growth. Due to the shock to the employment market caused by COVID-19, the number of employed persons is expected to remain at last year's level, and inflation is projected to rise by only 0.4% annually.
On the 1st, the government finalized and announced the "2020 Second Half Economic Policy Direction" containing these details at a joint briefing held by Deputy Prime Minister and Minister of Economy and Finance Hong Nam-ki at the Government Complex Seoul. Deputy Prime Minister Hong said, "This year, economic activity has contracted due to anxiety related to COVID-19, resulting in sluggish domestic demand, while export difficulties have intensified due to worsening external conditions," adding, "Efforts to revitalize consumption and tourism and boost investment vitality based on expansionary macroeconomic policies such as supplementary budgets will play a buffering role against downside risks to the economy."
Earlier, on December 19 last year, the government announced a GDP growth forecast of 2.4% for this year through the "2020 Economic Policy Direction." However, as COVID-19 rapidly spread worldwide thereafter, the government lowered the previous forecast by 2.3 percentage points, anticipating growth in the 0% range.
The "0.1% growth" forecast is among the most optimistic compared to forecasts announced domestically and internationally this year. The International Monetary Fund (IMF, -1.2%), the Bank of Korea (-0.2%), and the Korea Institute of Finance (-0.5%) all predicted negative growth this year. The Korea Development Institute (KDI), a government-affiliated policy research institute under the Ministry of Economy and Finance, forecasted 0.2% growth.
The Ministry of Economy and Finance particularly expects private consumption to serve as a pillar, defending against a fall into negative growth. Numerically, private consumption is forecasted to decrease by 1.2% this year compared to the previous year, then rebound with a 4.5% increase next year. Although private consumption recorded -4.7% in the first quarter of this year, it is expected to turn positive and show improvement in the second half of the year, supported by government fiscal expansion and consumption activation measures. Lee Hyung-il, Director of the Economic Policy Bureau at the Ministry of Economy and Finance, said, "Private consumption accounts for half of GDP, making it an important portion," adding, "Considering recent trends such as retail sales recovering since April, we believe private consumption can hold up to some extent." He continued, "The second half economic policy direction also emphasizes consumption measures," and added, "If various measures combine, consumption will improve further, and based on this, we expect about 0.1% growth and will strive considering all other investment measures."
However, the government did not specifically disclose the policy impact of the second half economic policy direction announced that day and the third supplementary budget plan scheduled for release this week on contributing to the "0.1% growth." Deputy Minister Bang Ki-seon of the Ministry of Economy and Finance said, "It is not easy to state exact numbers," and added, "We will do our best with policies to achieve 0.1% growth."
The economic growth forecast for next year was presented at 3.6%, expecting a gradual U-shaped recovery. Director Lee Hyung-il explained, "It will definitely be a number higher than the potential growth rate," adding, "Since this year is very low, we expect a healing pattern as it rises."
Along with this, the government forecasted that the increase in the number of employed persons this year will be '0,' remaining stagnant. It explained that employment shocks caused by COVID-19 will be partially offset by policy effects such as job support projects, preventing a decline. The employment rate (ages 15-64) is expected to slightly fall to 66.4% from last year's 66.8% due to the slowdown in employment growth. Next year's employment rate is projected to improve gradually, recovering to 66.8%, the level of last year.
Inflation is expected to rise by only 0.4% annually this year due to overlapping supply and demand factors such as falling international raw material prices including oil and sluggish domestic demand. This is the same level as last year's inflation rate, which reflected the impact of low growth. It is expected to rise to about 1.2% next year.
The current account balance is forecasted to record a slight decrease to a surplus of $58 billion compared to last year's $60 billion, despite improved terms of trade due to falling oil prices, as global trade contraction reduces exports. Next year, the surplus is expected to shrink further to $56 billion. Exports and imports are expected to contract by -8.0% and -8.7% respectively this year compared to the previous year, then grow by 8.5% and 9.2% respectively next year.
Additionally, facility investment is expected to increase by 1.7% this year and recover more steeply to 6.0% next year, while construction investment is forecasted to turn from a -1.0% decrease this year to a 0.5% increase next year. The current growth rate is projected at 0.6%, lower than last year's 1.1%, and 4.8% next year.
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