The International Monetary Fund (IMF) lowered its growth outlook for South Korea to 2.8 percent from 3 percent last month. The country’s growth projection this year was also slashed to 2.7 percent by the Bank of Korea and the Korea Development Institute (KDI), and even to 2.5 percent by another research institute. The outlook for next year looks even grimmer as it is estimated to be around 2.6 percent or lower. The overall economic growth is slowing down and is expected to slip even further, raising people’s anxiety about the economy falling into recession.
With its high trade and financial openness, South Korea is particularly vulnerable to these unfavorable factors. Domestically, the change of an industrial structure, economic policies, and issues in the labor market could have affected the growth rate. The trend of a falling potential growth rate, which projects long-term economic growth, could have also contributed the outlook cut.
It is difficult to accurately calculate the potential growth rate in real time, so it is not certain whether the current actual economic growth rate falls short of the potential growth rate. Estimating the potential rate is even more difficult when the rate is not stable but on a declining trend. As low-interest policies have been put in place for several years, the current economic state may be already fully stimulated.
Excessive economic stimulus not only leaves little room for the economy to grow in the long term but also mislead people to overestimate the current potential growth rate and ignore the declining trend. As the projection of the potential growth and economic situation will get more accurate over time, the government should now be cautious in implementing stimulus measures, but put in more efforts to enhance the economy’s strength to grow in the long term. It is easy to get anxious and restless in the face of the economic slowdown, but now is the time for the government to pay attention to fundamental, long-term aspects.