In an about-face from its persistent economic optimism, the presidential office has begun to concede that the country’s economy may be slipping into a prolonged downturn.
During a press briefing last week, Yoon Jong-won, the senior presidential secretary for economic affairs, said the Korean economy is poised to face heightened downside risks amid deteriorating external conditions. He said the possibility of the risks being drawn out could not be ruled out, as external uncertainties have increased more than expected at the outset of the year.
Yoon’s assessment of the economic situation marks a departure from the optimistic views repeatedly expressed by President Moon Jae-in and his aides.
In a TV interview last month, Moon said he expected the economy to begin improving gradually in the April-June quarter of the year and to grow at a pace close to its potential growth rate, estimated to be upward of 2.5 percent, in the second half.
It is good that the Moon administration is beginning to have a more realistic outlook for Korea’s struggling economy. What is worrisome is that the presidential aide cited only external conditions as a reason for increasing downside risks faced by the economy, turning away from the fallout from ill-conceived policies pursued by the government over the past two years.
As noted by Yoon, it is natural for the domestic economy to be affected by the global economic environment. Korea saw outbound shipments of goods decline on-year for the sixth consecutive month in May mainly due to escalating trade tensions between the US and China -- its two largest trading partners -- and a continuous drop in chip prices.
But, as many economists indicate, the deepening woes of the Korean economy cannot be accounted for completely without factoring in the spreading negative effects of the misguided policy adopted by the Moon administration.
Its income-led growth drive propelled by pro-labor measures, including steep minimum wage hikes and a shorter workweek, has been coupled with tighter business regulations, dampening corporate activity.
A sharp drop in facility investment by local companies was the main factor behind the 0.4 percent on-quarter contraction of the economy in the first three months of the year.
But Yoon did not mention the aspect of policy failure, attributing the worst economic performance in a decade to external conditions and sluggish fiscal spending by regional governments.
He went on to counter criticism of the way the Moon administration has handled the economy by downplaying worries over the current account deficit in April -- the first in seven years -- as temporary and noting that the number of young employees has been rising.
His claims simply miss the point.
The current account deficit cannot be considered temporary due to a one-off factor of dividend payments to offshore investors, which have been made in the same month every year.
A close look at employment data shows that the increase in the number of young employees stemmed largely from a rise in the number of part-timers who work less than 17 hours per week. What should warrant attention is that the actual youth unemployment rate -- which factors in people who remain economically inactive after failing to land a job over the past month -- soared to a record high of 25.2 percent in April.
Highlighting downside risks without making a policy shift may well be viewed as an attempt to put pressure on opposition lawmakers to cooperate in passing a supplementary budget bill the government submitted to the parliament in April.
The main opposition Liberty Korea Party has boycotted parliamentary proceedings over a set of controversial legislative proposals pushed by the ruling Democratic Party of Korea.
Before embarking on a trip to northern Europe on Sunday, Moon told senior ruling party members that he felt burdened by the stalled process of approving the extra budget bill and that people might also think badly of it.
But it is not certain that additional fiscal spending would result in reinvigorating the economy and creating more jobs as Moon and his aides say. The two previous extra budgets implemented by the incumbent administration have done little to improve economic and employment conditions.
The economy will be drawn deeper into a downturn if the Moon government continues to attribute the worsening economic situation to unfavorable external conditions and uncooperative opposition lawmakers instead of making a fundamental policy shift.
It needs to focus on creating a corporate-friendly environment to encourage companies to increase investment and hire more workers. The ill-conceived income-led growth policy should be ditched, and fiscal stimulus should be redesigned to be more effective in reinvigorating the private sector.