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Elections may play major role in 2020 growth

Jan 28,2020
While the Korean government is hoping for a 2.4 percent economic growth this year, the Bank of Korea (BOK) projects a slightly lower growth of 2.3 percent.

If so, this would be the first time that the Korean economy has expanded in the 2-percent range for three consecutive years since data has been compiled in 1954, just after the Korean War.

The year started with the positive news of the United States and China reaching their first phase of trade negotiations. But unexpected factors, such as the Wuhan coronavirus as well as the upcoming Korean general election in April and the U.S. presidential election in November, are expected to also have some effect.

Market experts expect the government to aggressively front-load its budget around the Korean general election.

“In the first half of this year the government has set the budget execution at 62 percent, which is an all-time record,” Finance Minister Hong Nam-ki said on Jan. 8 during a minister-level meeting. “Especially in the first quarter we will execute 32 percent [4.4 trillion won or $3.7 billion] in job creation, which is an area that is most sensitive to the public.”

The budget frontloading comes at a time when the economy has continued to struggle over consumption in the private sector and business investments. The government’s aggressive spending last year helped the economy from falling below 2 percent growth.

The government especially plans to focus its spending on infrastructure such as railways (6.4 trillion won) and roads (6.6 trillion won), which are closely related to the campaign promises of general election candidates.

Until March, the government plans to spend a total of 14.1 trillion won on such infrastructure, which is 30 percent of the annual budget for infrastructure.

Real estate is another factor that could affect the Korean economy.

Due to the government’s intensified regulations, housing prices have stabilized. However, real estate transactions have frozen.

Last year, housing transactions by volume was down 23.2 percent compared to the previous year.

According to the BOK, construction investment last year fell 3.3 percent year-on-year. This was the second year in which construction investment has shrunk. In 2018, construction investment fell at a sharper rate of 4.3 percent.

During a press conference on Jan. 17, BOK Gov. Lee Ju-yeol said as in all policies, there are some side effects indicating that the frozen real estate transaction is the results of the government’s tightened regulations in stabilizing the housing prices.

The government’s tighter regulation, however, is also affecting the BOK’s decision on the country’s key interest rates.

The Korean central bank has room to further lower the key interest rates in boosting the economy.

However, the lowering of the interest rates could again encourage real estate investments that would raise housing prices.

At the same time, the BOK could further negatively impact the growth on consumer spending if it raises the interest rate. A higher interest rates will increase the burden of those with debt.

The market is also looking closely at U.S. President Donald Trump, who is hoping to be reelected this year, as he could further expand trade wars with other markets.

In a recent interview with the JoongAng Ilbo, Yale University professor Stephen Roach said Trump will likely drag on the trade conflict with China until the fall.

Roach said that Trump’s support will be stronger if he continues his trade war against China.

The trade tensions between the two major trading partners of Korea could affect Korea’s exports.

But one positive factor this year is expected to take place in July when the Olympic Games are being held in Tokyo. The sports event is expected to exhibit the world’s leading technologies, which could have a positive effect on Korea’s own technology.

Artificial intelligence, 5G mobile telecommunications, autonomous driving, Internet-of-Things and virtual reality are all likely to be showcased during the Olympic Games.

BY JOO JEONG-WAN [lee.hojeong@joongang.co.kr]