(EDITORIAL from The Korea Herald on June 29)

Navigating Brexit
Economic officials should contain fallout from turmoil

The government has unveiled its economic management plan for the second half of the year amid turmoil in global financial markets following Britain’s decision to leave the European Union.

The focus of the plan is on creating and retaining jobs as job market conditions are expected to worsen due to the weakening economic recovery and the ongoing restructuring of ailing industries.

The economy grew a mere 0.5 percent on quarter in the first three months of the year, slowing down from the 1.2 percent expansion in the third quarter of 2015 and 0.7 percent growth in the fourth quarter.

The tepid performance in the first quarter and growing downside risks from home and abroad in the months to come led the government to slash its growth outlook for this year from 3.1 percent to 2.8 percent.

To boost the sagging economy, the government plans to increase fiscal spending by 20 trillion won (about $17 billion), of which 10 trillion won will come from an extra budget and the remainder from state-run corporations and funds. It expects the increased spending will raise the growth rate by 0.2-0.3 percentage points.

The government’s move to expand fiscal spending is well-advised. The problem, however, is that its spending plan appears to be based on an overly rosy growth projection.

The government’s lowered growth estimate is still high compared with those of private research institutes presented before the Britain’s vote to leave the EU loomed large. Hyundai Research Institute, for instance, forecast in May the economy would grow 2.5 percent.

The Brexit vote has led private economic institutions to cut their growth projections further. The Korea Economic Institute said it would slash its growth outlook from 2.6 percent to the lower end of the 2 percent range.

This suggests that the government may not attain the revised growth target even when the proposed stimulus plan is executed. Therefore, it is advised to determine the amount of additional spending based on a more realistic analysis.

Economic officials say the Brexit vote will only have a limited effect on the Korean economy, as the trade and financial ties between the two countries are not significant. They note that Britain accounts for a mere 1.4 percent of Korea’s exports.

The vote is unlikely to throw Korea into an economic crisis, but it could further undermine the economy’s already fragile momentum for recovery. Even without Brexit, the economy has been unable to climb out of a prolonged slump.

Economic officials need to step up monitoring of the global financial markets to minimize the adverse effects Brexit could have on the Korean economy. They should pool their wisdom to steer the economy through the rough waters.

Despite the increased downside risks from abroad, the government should push ahead with the restructuring of ailing industries, including shipbuilding.

The planned extra budget should be spent on easing the pains of restructuring. The government needs to come up with programs tailored to workers who are made redundant.

The restructuring process would be less painful if lawmakers pulled their weight. They are strongly advised to pass the government-proposed labor reform bills as early as possible, as they are meant to provide enhanced benefits to workers and facilitate job creation.
(END)