Gloomy economic outlook for the second half of the year

Economy and Finance Minister and Deputy Prime Minister Hong Nam-ki on Wednesday called a meeting to discuss ways to vitalize the economy and announced the government’s economic policy direction for the second half of this year that centers on enhancing economic vitality, improving economic fundamentals, and strengthening inclusiveness.

According to the government’s diagnosis of the economic situation, Korea has tough external factors that will negatively affect our economy in the second half. It pointed out the global production and manufacturing slump and the possibility of a prolonged trade row between the U.S. and China. In particular, with the price of memory chips, the nation’s key export item, declining rapidly, there is little hope for a rapid recovery of our economy.

The government lowered its economic growth outlook for this year from 2.6-2.7 percent to 2.4 - 2.5 percent based on reasons such as lack of innovation in industries and weak growth potential. The actual economic growth rate could be lower than the government outlook if the semiconductor and display industries experience setbacks in production due to Japan’s economic retaliation. In a separate meeting with the ruling party and the presidential office on Wednesday, the government has promised to invest 1 trillion won every year in the research and development of semiconductor components, materials, and equipment. But it is insufficient to address the current issue at hand.

There is only a diagnosis of the current economic situation but no concrete measures to overcome the difficulty in the government’s economic policy direction for the second half. One of the key measures presented at the meeting was to revise the Tax Reduction and Exemption Control Act and temporarily expand an investment tax credit from the current 1 percent to 2 percent for one year. But it is doubtful whether businesses would be attracted to make an investment in exchange for such little benefit. Another measure proposed at the meeting was lowering individual consumption tax from 5 percent to 1.5 percent for those who scrap their old cars and buy a new one, thereby help boosting domestic demand. These measures are may be better than nothing but are still nothing more than stopgap measures. It is hard to expect that these makeshift measures would revitalize the sluggish economy and improve economic fundamentals.

If both external and internal economic conditions are expected to be tough for South Korea, the government should come up with special countermeasures. For example, lifting regulations that hamper the growth of businesses in new industries including sharing economy and the service industry could be one. The government should also demonstrate a strong willingness to correct violent practices of labor unions of large businesses. Giving a temporary tax reduction or increasing temporary jobs using subsidies is far from enough to revitalize our economy in the second half.