OECD cuts S. Korea's 2017 growth estimate to 2.6 pct

By Kim Boram SEJONG, Nov. 28 (Yonhap) -- The Organization for Economic Cooperation and Development (OECD) on Monday revised down its 2017 growth forecast for the South Korean economy to 2.6 percent from 3 percent, citing a slowdown in government spending. For 2016, the OECD said its outlook for South Korea remains unchanged at 2.7 percent, while the economy will expand 3 percent in 2018. In its earlier forecast released in June, the OECD had expected that South Korea would pull off 3 percent growth next year. The OECD's cut in its 2017 growth outlook is in line with moves by other private and state-run think tanks, including the Korea Development Institute, which came up with an estimate of 2.7 percent for 2017 and the Korea Economic Research Institute with a 2.2 percent growth projection. The South Korean government is also expected to slash its earlier growth target of 3 percent for next year. The biannual OECD Economic Outlook said South Korea's recent plan to tighten government spending will drag down the country's growth next year to a large extent. Earlier, the government drew up a new state budget management plan to hold the balance of the government budget-gross domestic product (GDP) ratio at 3 percent in any circumstances in order to deal with the national finances more effectively in the face of low economic growth and an aging population. "Economic growth continued at a moderate pace in 2016, supported by a supplementary budget and record low interest rates," the Paris-based agency said. "The planned budget consolidation in 2017 will restrain growth. Instead, to support growth, government spending should be increased beyond the levels set in the national fiscal management plan." It noted that South Korea has benefited from a supplementary budget to inject an additional 11 trillion won (US$9.4 billion) into the economy, which has been struggling with faltering exports and slowing private consumption. The government also eased financial regulations to boost the local property market, encouraging people to borrow money and buy a house. The country's exports have posted negative growth 21 times in the last 22 months since the first month of last year due to contracted global trade and low oil prices, while the local housing market has enjoyed a boom on the back of the government's supportive policies. The OECD report called for stronger fiscal intervention by the South Korean government to stimulate the economy, as the monetary tool is limited in the face of a possible U.S. rate hike and mounting household debt, which topped 1,300 trillion won recently. "As the prospect of further monetary expansion may be increasingly constrained, fiscal policy should be used more actively as a way of ensuring adequate aggregate demand," it said. "An improved fiscal framework is a priority to allow greater flexibility to help Korea break out of its low-growth trap while keeping public debt low over the long term." For 2018, Asia's fourth-largest economy is projected to grow 3 percent on the back of a recovery in world trade, despite political uncertainty stemming from the scheduled presidential election in 2017 and corporate restructuring in key sectors. "Given Korea's reliance on export-led growth, a delayed rebound in world trade is the biggest risk to achieving 3 percent output growth," said the OECD. "Well-designed fiscal stimulus and effective structural reforms could reignite domestic demand and reverse the decline in Korea's export performance, leading to faster growth." brk@yna.co.kr (END)