South Korea has largely raised its economic forecast for this year amid expectations of record exports and a rebound in consumption as immunization levels rise.
The country’s gross domestic product is expected to grow 4.2 percent this year, a percentage point higher than the previous projection at the end of last year, the finance ministry said in its semi-annual political outlook. Inflation is likely to reach 1.8%, the ministry said, up from its earlier expectations of 1.1%.
The government’s forecast is more optimistic than the central bank’s, as expected spending from an upcoming supplementary budget has been reflected. The ministry is forecasting an increase of 250,000 jobs this year, while the Bank of Korea sees just over half.
The economy has already surpassed its pre-pandemic size earlier this year, as exports surged as part of a reopening of major economies and fueled investment in the country. Yet the government has taken note of the growth trajectory – or average growth rates over several years – which remain lower than those observed before the pandemic, and wishes to maintain fiscal stimulus measures.
The government expects shipments to jump 18.5% this year to an annual record of $ 607.5 billion. The pace of gains will slow after peaking in the current quarter. Consumption will also recover, but will lag behind pre-pandemic levels with a gain of 2.8% as international travel remains limited.
The economy would benefit from a new boost if another supplementary budget being prepared by the government was approved. Finance Minister Hong Nam-ki said last week it would likely exceed 30 billion won ($ 26.5 billion), marking one of the biggest stimulus packages since the start of the pandemic.
The proposal will be submitted to parliament in early July.
The government aims to use the additional funds to facilitate a recovery in consumption, including issuing various coupons and offering cash back on credit card spending.
It also plans to create more than 150,000 jobs and expand employment benefits to tourism and other service sectors that are still struggling.
“The government will try to ensure that the consumption capacity accumulated during the pandemic is released to the sectors that have suffered the most from the virus,” Deputy Finance Minister Lee Eog-weon said in a briefing.
President Moon Jae-in has called for expansionary budget spending until next year to ensure that the benefits of an economic recovery are fairly distributed. Growth and inflation are expected to slow to 3% and 1.4%, respectively, in 2022, the ministry said.
That would bring the average growth rate for 2020-2022 to 2.1%, lower than 2.8% in 2017-2019, the statement said.
The ministry said monetary policy should remain accommodative while paying more attention to financial stability, in line with the central bank’s latest position.
The Bank of Korea has sent strong signals that it will start raising rates this year, citing growing risks of asset bubbles due to the easing of the pandemic era. On June 24, Gov. Lee Ju-yeol said a few hikes would still leave an accommodative policy, and additional budget spending may provide coverage for those who would be most vulnerable at higher rates.