hankyoreh

By Park Sun-bin, senior staff writer

The Bank of Korea (BOK) lowered its 2013 economic growth projection to 2.8%, down from 3.2% last October. But its Monetary Policy Committee decided at a Jan. 11 meeting to keep the January benchmark interest rate in place despite the large drop in predicted growth. The interest rate has been frozen for three months since being lowered from 3.0% to 2.75% in October.

The BOK announced on Jan. 12 that it was projecting real gross domestic project (GDP) growth rates of 2.0% for 2012 and 2.8% in 2013 - each down 0.4 percentage points from the predictions of 2.4% and 3.2% made in October 2012. Deputy governor Kim Jun-il explained that the projections were lowered because of a stronger than expected slump in domestic investment consumption due to continued external uncertainty.

Another factor in the lowering of the rate projections was the slowdown in global trade amid the US's struggle to recover from the global financial crisis and the European real economy's decline. 
It is unusual for the South Korean economy to struggle with growth rates under 3% for two consecutive years despite there being no unexpected shocks during that period. Also, the real growth rate since 2011 - a point of pride for the administration, which claimed to have been faster than other countries in getting over the global financial crisis - has remained consistently below the long-term growth trend. With this comes the growing possibility of the national economy becoming bogged down in low growth over the long term as its growth potential drops.

The government's explanation is consistently the same: external conditions. But this argument is less than totally convincing, as the BOK's growth rate projections for 2012 and 2013 fall under the respective averages of 3.1% and 3.4% for the global economy as estimated by the International Monetary Fund. 
Indeed, an analysis of GDP by areas of spending shows the main culprit to be low domestic investment. By BOK estimates, facility investment for the second half of 2012 was down 5.2% from the same period in 2011, and the rise in construction investment stood at -1.2% after registering a -0.6% rate in the first half of the year. Those percentages are respectively predicted to grow to 2.7% and 2.5% this year, but even those levels are unimpressive given the baseline effect from last year's poor performance. With low investment meaning worse hiring conditions, the BOK predicted that about 300,000 new jobs would be created this year, down from around 440,000 in 2012.

With its decision, the BOK opted not to take action to stimulate the economy through monetary policy measures despite the gloomy predictions.

Explaining the decision at a press briefing after the announcement of the interest rate freeze on Jan. 12, Governor Kim Choong-soo said, "In quarterly terms, we are at least maintaining a gradual growth trend, and we don't expect the economic situation to be any worse going ahead."

The BOK predicted the domestic economic growth rate would rebound above 3% some time in the second half of the year. Its 2014 growth rate projection was 3.8%.

Please direct questions or comments to [englishhani@hani.co.kr]