"Even Prices..."... '4% Growth Rate' Warning Lights Turned On

Q3 Growth Rate Limited to 0.3%
Q4 Consumer Sentiment Expected to Weaken
"Fiscal Spending Effect Not Significant"

[Asia Economy Reporter Jang Sehee] As 3% high inflation becomes a reality, concerns are once again emerging that achieving this year's economic growth target of 4% will not be easy. Following a 0.3% growth rate in the Korean economy in the third quarter compared to the previous quarter, there are forecasts that consumer sentiment will rather contract in the fourth quarter due to rising prices.

Professor Andonghyun of the Department of Economics at Seoul National University said on the 2nd, "When prices rise, consumer prices also increase, which can lead to a contraction in consumption itself." This means that if strong inflation continues, consumers may hesitate to purchase, weakening the trend of retaliatory consumption.

Typically, in the fourth quarter, growth tends to rebound as budget spending concentrates and year-end consumption effects coincide. In particular, the government is operating consumption stimulation measures such as disaster relief funds, cashback, and compensation for small business losses to support the With Corona (gradual return to normal life) policy. Through this, the government believes achieving this year's economic growth target of 4.2% is possible.

A senior government official stated, "With the With Corona (gradual return to normal life) policy, consumption is expected to increase somewhat in the fourth quarter," adding, "The effects of policies such as disaster relief funds will be reflected in the fourth quarter growth rate."

However, considering COVID-19 variables and domestic and international risks, optimism is difficult. In fact, last year's fourth-quarter growth rate was 1.1% compared to the previous quarter, which was lower than the previous quarter's 2.2%. Although this was not due to high inflation, the impact on private consumption was significant. Last year, the GDP growth contributions of net exports and private consumption were 0.5% and -2.4%, respectively.

There is even an argument that the government's fiscal spending effect does not significantly help the growth rate. Professor Ahn said, "If the fiscal multiplier of government spending is 0.6, then transfer payments are at a low level of about 0.3," adding, "Cashback, disaster relief funds, and compensation for losses are classified as transfer payments, so their contribution to GDP is relatively low."

It is also argued that rising prices not only suppress consumption but also investment, and that global supply chain bottlenecks negatively affect exports, ultimately playing a negative role in the growth rate.

Jung Kyucheol, head of the Economic Forecasting Office at the Korea Development Institute (KDI), said, "When prices rise due to supply-side factors, household consumption and corporate investment can contract," adding, "Looking ahead, upward factors such as the second supplementary budget and downward factors such as high inflation and global supply bottlenecks are expected to overlap in affecting the growth rate."

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