The National Assembly Budget Office published < Medium-term economic forecast for year 2014> in order to support the National Assembly with its auditing of the 2014 budget and national fiscal management plan for years 2013-2017, submitted by the Executive Branch.

  This report forecast that the domestic economy will grow by 3.5% over the course of 2014, marking an increase of 0.9%p over the growth rate in 2013 (forecast 2.6%). Behind this forecast lie the facts that the economies in the developed world and broader global trade have both been picking up, leading to an improved export environment, while domestic demand is also expected to grow at a higher rate, albeit gradually. These forecast figures 0.4%p lower than the 2014 budget forecast submitted by the Executive Branch, which is 3.9%. In the budget, the Executive Branch expects the current accounts growth rate to be 5.9%, an increase of 1.9% over 2013 (forecast to be 4.9%). This is because the real economic growth rate (from 2.6% in 2013 to 3.5% in 2014) and the GDP deflator growth rate (1.4% in 2013 to 2.3% in 2014) will both grow in tandem.

   It is expected that the average annual growth rate for the Korean economy for the years 2013 to 2017 will be 3.5%, which is lower than the pre-financial crisis years of 2003 to 2007. During that time the average annual growth rate was 4.3%. The export environment for Korea is anticipated to improve but the rate at which this improvement will occur is likely to be gradual, due to exit strategies (a scaling back of its fiscal stimulus and a hike in the official interest rate) implemented by the US and Europe and their prolonged fiscal crises. These two developments have cut the rate of economic recovery in both regions. Meanwhile, with China focusing more on qualitative growth, its growth rate has also slowed. This all adds to the likelihood of a slower rate at which the export environment will improve. An increased burden on domestic households due to household debt, a weak employment market, and a less than stellar investment environment will also slow down the pace at which domestic demand will grow. The Korean economy is expected to show a phase of gradual improvement from 2013 to 2016. This is because economies in developed countries including the US are anticipated (in the IMF forecast) to continue to pick up throughout the years to 2016. However, it is forecast that this trend will reverse in 2017 reaching a growth rate of 3.7%, as interest rate hikes both at home and abroad take effect and the economies of developed countries start to slow down.

   Meanwhile, the expected average annual real economic growth rate for the years 2014-2017 as indicated by the Executive Branch in its fiscal management plan stands at around 4.0% (as opposed to the 3.7% given by the National Assembly Budget Office). The average annual current accounts growth rate for years 2013-2017 is forecast to be 6.5% , which is higher than the 5.7% rate provided by the National Assembly Budget Office.

   However, the possibility of a delayed economic recovery cannot be ruled out, especially if the side effects of the exit strategy taken on by the US (e.g., a dialing back of fiscal stimulus and interest rate hikes) spread, or if the Korean government does not respond with proper policies to the situation. This forecast is, in turn, based on forecasts published by major research institutions (e.g., IMF, OECD) which state that the shock to the real economy will be minimized even though the exit strategy by the US takes full effect - as the US government is expected to flexibly execute the said exit strategy.

   What this implies for our own policies is that first, a defensive policy measure will be needed in anticipation of a possible instability in the financial markets of emerging economies following the effects of the US exit strategy going into full swing (that is, over the short-term, when the fiscal stimulus is eased, and over the medium-term, when interest rates are increased.)

 
   Second, while the Korean economy is showing signs of recovery, the overall growth is low. This means policies need to be put in place to inject vibrancy into the domestic economy and improve  the potential growth rate, especially given that the environment for tax revenue collection has worsened and job creation is taking longer than expected. Lastly, despite the government’s efforts to emphasize the importance of employment policies through its ‘Road Map for an Employment rate of 70%’ and prioritize related issues, it seems that it will be difficult to develop a more concrete plan for youth job creation over the medium to long-term. Therefore, policies will have to be fleshed out in further detail in order to ensure that meeting policy goals equates to the actual creation of jobs for the young.