Economic Fears for 2nd Half Linger Despite Recovery Signs

President Lee Myung-bak says talk of an exit strategy for excessive market liquidity is premature and wants to maintain expansionary policies until year’s end.

With the government running out of budget, however, fears are rising over a halt to economic recovery in the second half of the year. Economic growth reached 2.3 percent in the second quarter but will likely stagnate in the third, so the government is striving to maintain growth momentum.

A high-ranking official at the Strategy and Finance Ministry said yesterday, “Government spending, which has driven economic growth through the second quarter, will likely be unavailable in the second half. So the possibility of growth plunging below one percent cannot be ruled out.”

Despite President Lee’s assurance that expansionary policies will continue to shore up economic recovery, the government has few policy options to prevent a steep fall in growth, experts say.

Of 257.7 trillion won (209 billion U.S. dollars) in budget allocated to revive the economy this year, 65 percent was spent in the first half. Additional spending is impossible in the second half except that for job creation.

Private investment and domestic consumption could replace government spending in boosting the economy, but have shown no signs of improvement.

Facility investment fell 13.1 percent in May from the same month last year, continuing its double-digit decline for seven straight months. Domestic consumption began rising the same month, but at a meager pace of 1.7 percent.

Cho Gyeong-yeop, head of research at Korea Economic Research Institute, said, “The economic situation is better than reflected in the forecast made early this year, but could give false hope since it stemmed from the injection of state funds.”

“The government needs a new policy approach to help the economy grow without public spending.”

The government is said to be considering measures to encourage corporate investment through deregulation, enhance the effectiveness of job creation policies, and improve the productivity of smaller companies. Whether such moves will produce results remains unclear, however.

Yoo Byeong-gyu, head of research at Hyundai Economic Institute, said, “The Korean economy can face a double dip if the government exhausts policy measures and corporate investment and consumption stay lackluster.”

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