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State spending fails to boost investment, consumption
By Lee Kyung-min
The economy grew at a much slower pace than expected in the third quarter, indicating that government spending has failed to bolster sluggish investment and consumption, central bank data showed Thursday.
In advance estimates, the Bank of Korea (BOK) reported that the nation's gross domestic product (GDP) grew 0.4 percent in the third quarter from a quarter earlier, a major setback from the second quarter's 1 percent expansion. The economy contracted 0.4 percent in the first quarter.
The slower-than-expected growth is fueling concerns that the Asia's fourth largest economy will see its annual growth rate fall below 2 percent.
This has occurred four times in the past, first in 1956 when the country's agriculture industry was hit by unfavorable weather, in 1980 amid the oil crisis in the Middle East, in 1998 following the fallout of the Asian financial crisis and in 2009 after the global financial crisis.
"More than 2 percent annual growth will be possible only if the economy expands over 0.97 percent on a quarter-on-quarter basis in the further quarter," Finance Minister Hong Nam-ki said during a National Assembly audit, Thursday.
"The government will take all possible measures for the economy to grow more than 2 percent," he added. "It is important to execute state spending as scheduled."
But, given that investment and private spending have stayed in the doldrums amid lingering uncertainties caused by the U.S.-China trade feud, it is improbable that the economy will grow around 1 percent in the last quarter.
BOK Governor Lee Ju-yeol also said, "It may not be easy to achieve 2 percent growth. But we still need to wait and see because there could be many variables in the fourth quarter, such as additional government spending."
In its latest outlook report a week ago, the International Monetary Fund (IMF) lowered Korea's 2019 growth forecast to 2.0 percent from 2.6 percent. It also downgraded its outlook for next year to 2.2 percent from the 2.8 percent it forecast in April.
The central bank said the key culprit behind the poor performance between June and September was sagging domestic demand.
Construction investment dropped 5.2 percent in the third quarter from the second quarter, while private consumption grew only 0.1 percent.
The sharp construction investment drop came due to declining orders for new residential buildings.
"A large volume of residential buildings were available following a construction boom that began in 2015 and continued through 2017. The current sluggishness in the sector is the result of a base effect from the previous quarter," a BOK official said at a press conference.
In contrast, government spending increased 1.2 percent, due mainly to the strengthened state-run health care services. Exports jumped 4.1 percent thanks to a slight recovery in sales of semiconductors and automobiles.
"Sales of automobile and semiconductors have been showing signs of recovery over the past few months, while investment is still undergoing adjustments," the BOK official said.
Experts said that the government should speed up structural reforms while introducing short-term stimulus measures through fiscal expansion and rate cuts.
Sung Tae-yoon, an economist at Yonsei University, said the government should prioritize increasing labor productivity and fostering new growth engines to tackle the slowdown, amid the falling potential growth rate.
"The labor force is shrinking amid a rapidly ageing population for which there is no near-term solution. The government should acknowledge the deteriorating environment and map out policies that boost productivity and foster innovation," he said.
