(News Focus) A full recovery in domestic demand is not in sight

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SEOUL, June 28 (Yonhap) – South Korea on Monday unveiled a package of measures to boost domestic demand in the second half of the year with massive budget spending, but experts said that a significant recovery in private spending was not was not an option in a context of uncertainty over the COVID-19 pandemic.

The Ministry of Finance announced its economic policy plan for the second half of the year, with the objective of a “complete” economic recovery of the country. To this end, the government will focus on supporting domestic demand and closing the widening income gaps, known as a K-shaped recovery.

The South Korean economy is on the road to recovery, driven by strong chip and auto exports and reviving domestic demand.

Asia’s fourth-largest economy is expected to grow 4.2 percent this year, following a 0.9 percent contraction last year, according to the ministry’s latest estimate.

After a year-long slump caused by the pandemic, domestic demand has improved in recent months amid economic recovery and vaccine deployment.

Private spending rose 1.2% in the first quarter from three months earlier, rebounding from a 1.3% quarter-on-quarter contraction in the fourth quarter of last year, according to the Bank of Korea (BOK) .

But domestic demand remains weak from pre-pandemic levels as in-person service segments, such as hotels and retailers, suffered job losses and declining sales.

To stimulate consumption, the government plans to offer cash back rewards for credit card spending. The three-month program will allow people to receive these benefits up to 300,000 won (US $ 265) per person.

The country will also resume a discount coupon program designed to boost consumption in accommodation, tourism, food and art. It will also launch a similar coupon system for watching movies and using rail and bus services.

Despite the government’s efforts, experts have expressed doubts whether the measures will have the intended effect of bolstering domestic demand as global concerns grow over highly contagious variants of COVID-19.

“It may be difficult for the country to expect a full-blown recovery with budget spending as uncertainty persists over how the pandemic will play out,” said Joo Won, chief economist at the Hyundai Research Institute. .

The rapid spread of the Delta variant, which originated in India, could complicate health authorities’ fight against COVID-19 later this year, potentially undermining the economic recovery.

Kim Yoo-mee, economist at Kiwoom Securities Corp., said the recovery in domestic demand is expected to be slow as low-income people face difficult employment situations and do not have enough room to increase demand. consumption due to lower income.

Critics said the cash rewards program could only benefit high-income people, leaving low-income people and those with low creditworthiness out of such support.

“More targeted support to low- and middle-income households will be needed to stimulate spending,” Joo said.

The country reported job creation for the third consecutive month in May, but the recovery in employment remains uneven across sectors and age. The service industry and those in their 30s and 40s are still suffering from job losses.

The government is planning this year’s second supplementary budget, estimated at around 30 trillion won, as it seeks to support vulnerable people hard hit by the pandemic and to support domestic demand.

South Korea established a 14.9 trillion won supplemental budget in March to fund 20.7 trillion won in emergency aid for small traders and self-employed workers.

But some experts have expressed concern that the creation of another large supplementary budget is not in step with the central bank’s move towards monetary tightening.

BOK Lee Ju-yeol said last week that his bank was ready to hike the key interest rate “by this year”, stressing the need to normalize monetary policy amid an accelerating economic recovery.

In May, the BOK froze its key rate at an all-time high of 0.5%. The central bank cut the base rate by 0.75 percentage points combined between March and May 2020 to support the economy affected by the pandemic.

The government rejected the view that fiscal and monetary policies go in opposite directions.

“Rather, it is a policy mix in which we seek to support vulnerable people with fiscal policy, and monetary policy focuses on mitigating financial imbalances,” said First Deputy Finance Minister Lee. Eog-weon during a press briefing.


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