Seoul throws $7 bn at weakening
economy By Robert M Cutler
MONTREAL - The latest South Korean
economic data confirm that a slowdown looms in the
second half of this year. The numbers come days
after the government reinvigorated its commitment
to maximize the current fiscal stimulus, by
announcing new measures totaling US$7.4 billion,
which could be increased further if conditions
deteriorate.
Of the seven measures
outlined in a statement by the Ministry of
Strategy and Finance, five are the objects of
targeted domestic policies. These include
continuing the fiscal stimulus by increasing
budget spending and other measures; creating (via
the Korea Development Bank and Industrial Bank of
Korea) a fund to finance facility investment by
business, including small and
medium-sized
enterprises; keeping inflation down to the 2%
range; creating 400,000 jobs this year helped by
tax incentives for job creation; and promoting
micro-financing and housing support.
Such
policy moves will be needed against the backdrop
of recent national economic performance. The
much-watched HSBC/Markit purchasing managers’
index (PMI) has fallen into contraction territory
for the first time in five months, dipping to 49.4
in June, down from 51 in May, while order book
volumes for manufacturing contracted for the first
time in five months. Output prices fell for the
eighth month running. Weaker demand on both the
domestic and the international side accounted for
the declines.
The ministry announced a
downward revision of the government’s economic
outlook, which was lowered to 3.3% expected growth
in 2012 due to external factors. This is down from
an original estimate of 3.7% growth, which was
itself lowered to 3.5% in April. However, the
government expects improvement towards the end of
the year as domestic demand recovers.
Inflation decelerated in June, falling to
a 23-month low of 2.2% year on year in June after
a 2.5% reading in May. The government’s new
projection is for inflation to fall to 2.8% for
the whole year after registering a 3.2% increase
in 2011, on the assumption of a continuing decline
in energy prices and oil in particular. This new
estimate is a reduction from the original 3.3%
expectation.
The assumption about energy
prices may be complicated by Seoul’s failure to
obtain exemption from European Union sanctions
should it continue to import oil from Iran, even
though the US granted it such an exemption. The
sanctions prevent shippers from getting EU-based
insurance for their cargoes. Iran has reportedly
offered to use its own tankers to supply oil to
South Korea, but Seoul is still discussing the
matter with Brussels. The EU sanctions took effect
on July 1.
South Korea holds presidential
elections on December 19. The incumbent, Lee
Myung-bak of the New Frontier Party (NFP),
formerly the Grand National Party (GNP), cannot
continue in office. He came to power in the
December 2007 election on a platform promising
economic growth and increasing incomes, but his
popularity has suffered with the difficulties in
the global economy.
The NFP nevertheless
turned in an upset win in the April elections for
a new legislature. It gained a bare 152 out of 300
seats with 42.8% of the vote, down from (in 2008)
167 out of 299 seats with 50.5% of the vote for
the old GNP plus the Park Geun-hye Coalition,
which latter split from and then rejoined GNP.
Park is daughter of Park Chung-hee, South
Korea’s president between 1963 and 1979. She is
now leader of the NFP, and opinion polls following
the April legislative elections showed her as the
overwhelming favorite in the NFP primary election;
Moon Jae-in is favorite in the opposition
Democratic United Party (DUP) primary. The
economic policies that Park advocated in her 2008
legislative race were conservative,
market-oriented, and anti-regulation, but she has
since then paid more attention to public welfare
issues.
A poll at the end of May showed
Park defeating Moon in a two-candidate race by an
average of 15.8% but, also in a two-candidate
race, barely edging out potential independent Ahn
Cheol-soo. Ahn is a dean at Seoul National
University and founder (now chairman of the board)
of AhnLab, the largest South Korean computer
security company. In a poll for a multi-candidate
race, Park was first with Ahn placing second and
Moon third.
It will be rough economic
going for whoever wins in the end. The economy's
first-quarter gain of 0.9% over the final quarter
of last year was an improvement over the 0.3%
growth registered quarter on quarter in
October-December 2011. This was due mainly to
exports, facilities investment, and government
spending. The growth in exports has been
facilitated by a weakening of the won, the
national currency, which has fallen about 6% over
the last year.
Nevertheless, a
director-general at the finance ministry, Choi
Sang-mok, alluding to the crisis in Europe, noted
that "South Korea's growth momentum is weak, but
it is faring well given deteriorating external
conditions", as quoted by Bloomberg News.
(Shipments to the EU were down 22.7% in the first
20 days of June from a year earlier.) The ministry
accordingly has lowered its prediction of export
growth from 6.7% on the year to 3.5%.
Dr Robert M Cutler (http://www.robertcutler.org),
educated at the Massachusetts Institute of
Technology and The University of Michigan, has
researched and taught at universities in the
United States, Canada, France, Switzerland, and
Russia. Now senior research fellow in the
Institute of European, Russian and Eurasian
Studies, Carleton University, Canada, he also
consults privately in a variety of fields.
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