[Weekly Review] Government "3.2% Growth Next Year"... Bank of Korea "Low Interest Rates Not Main Cause of Jeonse Prices"

[Asia Economy Reporter Kim Eunbyeol] Amid the alarming resurgence of the novel coronavirus infection (COVID-19), the government presented an economic growth rate of 3.2% for next year on the 17th. This forecast is based on the assumption that COVID-19 vaccinations will begin in advanced countries from the end of this year and early next year, leading to vaccine commercialization in the second half of the year.

However, the figure provided by the government does not reflect the possibility of raising social distancing to level 3 due to the spread of COVID-19. Experts are skeptical about the "rosy outlook" announced amid discussions about escalating to level 3 social distancing.

The Bank of Korea hinted at the possibility of lowering its growth forecast for next year (3.0%) if the COVID-19 spread continues through this winter and into next year. Bank of Korea Governor Lee Ju-yeol said at a briefing on the inflation target operation, "If the spread of COVID-19 does not subside beyond this winter, the resulting contraction in consumption will clearly act as a factor lowering next year's growth rate." If the growth forecast is revised downward, next year's growth rate would fall to the 2% range.

At the briefing, Governor Lee also pointed out that low interest rates, which the government cited as a main cause of the sharp rise in jeonse (long-term lease) prices, are not the primary factor. He emphasized, "I think the recent rise in jeonse prices is due to growing concerns about market supply-demand imbalances."

Government Forecasts 3.2% Growth Next Year... Growth Rate to Be Revised Down if Level 3 Social Distancing Enforced

In its economic outlook announcement, the government forecasted a growth rate of -1.1% for this year, marking a contraction for the first time in 22 years since 1988 (-5.1%). The growth forecast for next year was calculated based on expectations that both domestic demand and exports will improve. Exports, which performed poorly this year, are expected to rebound with growth in the 8% range, and private consumption is also anticipated to recover to the 3% range after a negative performance this year.

The government expects employment to increase by 150,000 next year, supported by economic improvement and demand recovery. The working-age population is projected to decrease by 231,000 this year and by 225,000 next year. The employment rate (ages 15?64) is expected to be 65.9%, similar to this year's 65.8%.

Next year's current account surplus is forecasted at $63 billion, and the consumer price inflation rate is expected to be 1.1%.

However, the government anticipates that if the COVID-19 spread intensifies and social distancing is raised to level 3, achieving the 3.2% growth rate next year will be difficult. If the highest level 3 is implemented, restaurants, cafes, and accommodation businesses will suffer significant damage starting from the end of this year.

Deputy Prime Minister and Minister of Economy and Finance Hong Nam-ki (center) is leaving after concluding the joint briefing on the "2021 Economic Policy Direction" held at the Government Seoul Office in Sejong-ro, Jongno-gu, Seoul, on the afternoon of the 17th. From the left, Deputy Prime Minister Hong Nam-ki, Minister of Employment and Labor Lee Jae-gap, Minister of SMEs and Startups Park Young-sun. Photo by Kang Jin-hyung aymsdream@

Measures to Revitalize Domestic Consumption Proposed... Concerns Over Polarization Due to Additional Income Tax Deduction for Credit Card Use

While presenting next year's growth rate, the government proposed various measures to stimulate domestic consumption. In particular, next year, if credit card usage increases by a certain level compared to this year, an additional income tax deduction of 1 million KRW will be provided. On top of the current deduction rates of 15?40%, an additional 10% deduction benefit will be given within a 1 million KRW limit. Annual credit card usage typically increases by more than 5%, but due to the severely weakened consumer sentiment, the government intends to expand the increase.

The individual consumption tax rate on automobiles, reduced by 30% to 3.5%, will be extended until the first half of next year. For households with three or more children, childbirth families, basic livelihood security recipients, and lower-income groups eligible for electricity bill welfare discounts, 20% of the purchase amount for high-efficiency home appliances will be refunded.

In the employment sector, the employment increase tax credit system will be temporarily revised for one year next year. Companies that increased employment and received tax credits of 7 to 12 million KRW per person (for small and medium enterprises) will not be penalized for unavoidable employment reductions this year, and the original three-year benefit period will be maintained. For young people who lost job opportunities due to COVID-19, internship-like work experience jobs will be provided. Support will be provided for a total of 100,000 people, including 80,000 in the private sector and 20,000 in the public sector.

However, experts express more concerns than expectations. They point out that the benefits provided by the government are concentrated on groups with consumption capacity, which could actually widen disparities. Professor Kim Soyoung of Seoul National University's Department of Economics criticized, "People will not spend more money just because they expect to receive income tax deductions a year later, so there is also a timing issue."

[Image source=Yonhap News]

Lee Ju-yeol: "If COVID Continues, It Will Lower Growth Rate"... "Low Interest Rates Not the Main Cause of Jeonse Price Increase"

Meanwhile, the Bank of Korea also expressed concerns that the resurgence of COVID-19 could act as a factor lowering the growth rate. Governor Lee said, "If the spread of the infectious disease does not subside beyond this winter, the resulting contraction in consumption will clearly lower next year's growth rate," adding, "However, looking at exports supporting the economy, recovery centered on semiconductors is expected to continue." If the global spread of COVID-19 can be quickly contained through vaccine distribution, exports could perform better than expected, but due to high uncertainty caused by the spread, the situation this winter must be closely monitored.

Regarding claims that low interest rates are the cause of recent jeonse price increases, he directly refuted the Ministry of Land, Infrastructure and Transport's position. Governor Lee stated, "Low interest rates may be one factor contributing to jeonse price increases, but they cannot be considered the main cause." He explained, "Jeonse prices are influenced by supply-demand conditions and government policies. Although the increase in jeonse prices has accelerated since June, the low interest rate trend has been maintained for a considerable period before that." He emphasized, "I think the recent rise in jeonse prices is due to growing concerns about market supply-demand imbalances."

Meanwhile, the Bank of Korea decided to maintain the inflation target of 2% and keep the current inflation targeting framework. Despite the impact of the COVID-19 pandemic and other factors causing consumer price inflation to remain in the mid-0% range this year, significantly below the target, changing the framework could cause greater uncertainty. The expectation that consumer price inflation will rise to around 1% next year is also a reason for maintaining the current framework.

This content was produced with the assistance of AI translation services.