Currency dealers monitor exchange rates at a trading room in Seoul in May. The government says it will boost spending to generate more growth and create more jobs. Photo: Jung Yeon-je / AFP

The South Korean government has downgraded its GDP growth forecast for this year to 2.4-2.5% from 2.6-2.7%, which was estimated early this year.

The government’s action had been expected after GDP contracted in the first quarter by minus 0.4%, and exports continued to slump due to worsening external conditions such as the prolonged US-China trade war. Delays in the price of memory chips recovering also added woe to the economy.

Given that the government growth forecast is a de facto target rate reflecting policy effects, the state’s exact estimates for growth this year is considered lower than the numbers announced.

The South Korean government said on Wednesday, in its economic outlook for the second half, that “policy efforts to boost the economy’s vitality, including an extra budget, investment revitalization, and export support plans will complement downside risks to the economy.”

The number of employed people is expected to increase by 200,000 this year due to these policies, which would be about double last year – when an extra 97,000 people were employed.

Consumer prices are forecast to rise only 0.9%, primarily due to falling oil prices and stabilizing prices of agricultural, livestock and fisheries products.

The current account is forecast to post a surplus of US$60.5 billion dollars, down from $63.5 billion last year. Despite an improvement in the service account deficit due to a rise in foreign tourists, sluggish exports are expected to reduce the current account surplus.

Private consumption is forecast to grow 2.4%, down from the 2.8% gain last year. But facility investment is forecast to fall 4.0%, worse than last year’s 2.4% decline.

Investments planned

The government plans to start implementing an ongoing corporate investment project in the second half by simplifying administrative procedures and alleviating conflicts of interests. The government said corporate investment totaling 8 trillion won could be undertaken.

It said investment by public companies would increase by 1 trillion won to 54 trillion won in the second half, and 600 billion won worth of private investment put into ports.

The government plans to also push for private funding in state-owned-corporation projects so that more than 10 trillion won will be injected into the economy in the second half.

Tax incentives

The government said measures to promote investment will include tax incentives.

The tax deduction rate for investments in facilities to enhance productivity will be raised temporarily from 1% to 2% for large companies, from 3% to 5% for mid-sized firms, and from 7% to 10% for small and medium-sized companies.

The deadline for investment tax deductions will also be extended from the end of this year to the end of 2021.

To support exporters, financing will increase by 7.5 trillion won during the second half and 2.5 trillion won will be offered to support their research and development, or merger and acquisitions, and facility investment.

In an attempt to boost consumption, the government cut taxes on the purchase of passenger cars from 5% to 3.5% until the end of this year.

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