Pandemic, election to put pressure on 2022 economic policy implementation

December 20, 2021

South Korea on Monday unveiled the 2022 economic policy plan aimed at putting the economy on a full growth track, but the country may have difficulty in achieving the policy goals amid the latest upsurge in COVID-19 cases and political uncertainty in an election year.

The finance ministry revised up its 2022 growth outlook for Asia’s fourth-largest economy to 3.1 percent from its earlier estimate of 3 percent. It also raised next year’s inflation outlook to 2.2 percent from 1.4 percent.

The government said its 2022 economic policy plans will be focused on propping up the recovery of domestic demand, supporting small merchants hard hit by the pandemic and tackling inflationary pressure.

It faces growing economic headwinds, mainly from the upsurge in COVID-19 pandemic and the spread of the omicron variant, and political uncertainty tied to the presidential election in March next year.

This photo, taken Dec. 16, 2021, shows a sign put up at a restaurant in Seoul that reads the closure of business due to the pandemic. (Yonhap)
This pool photo, taken Dec. 9, 2021, shows Lee Jae-myung, presidential candidate of the ruling Democratic Party (R) and Yoon Suk-yeol, presidential candidate of the main opposition People Power Party. (Yonhap)

This photo, taken Dec. 16, 2021, shows a sign put up at a restaurant in Seoul that reads the closure of business due to the pandemic. (Yonhap)

South Korea is grappling with the spike in virus infections and the number of critically ill patients after having eased virus curbs in November under the “living with COVID-19″ scheme meant to gradually return to normal life.

To contain the pandemic, the country reimposed tougher antivirus measures on Saturday, including lowering the maximum size of private gatherings to four people and restoring curfews on business hours at restaurants and cafes.

Health authorities warned the daily number of virus cases could jump to as many as 10,000 this month and 20,000 in January if the spread of the virus is not brought under control.

The government expects private spending to grow 3.8 percent next year after the estimated gain of 3.5 percent this year. Consumer spending contracted 5 percent in 2020, stung by the pandemic.

“The government viewed (the pandemic risk) as neutral next year, expecting it would gradually come under control,” First Vice Finance Minister Lee Eog-weon told a press briefing on Friday.

He said the pace of the economic recovery will likely hinge on how fast pandemic-related uncertainty eases.

The pandemic’s impact on consumption has gradually waned in the wake of the first wave of COVID-19 in February 2020 as people have learned to live with the virus and increased online shopping.

But employment at in-person service segments is still suffering strains due to the pandemic. South Korea reported job additions for the ninth straight month in November, but the number of employed people in the lodging and eateries sector declined for the first time in three months.

The Bank of Korea (BOK) said in a monetary policy report that private spending is likely to post strong recovery until the first half of next year, but uncertainty about the omicron variant and rising inflation could sap consumer spending.

South Korea has seen a buildup in inflationary pressure this year due mainly to surging energy costs and high prices of farm products.

Consumer prices are expected to grow at a slower pace next year than this year, but demand-pull price pressure is forecast to pick up next year. The BOK expects inflation to grow 2 percent next year after 2.3 percent this year.

BOK Gov. Lee Ju-yeol said Friday that consumer inflation will run higher than the central bank’s target of 2 percent for “a considerable” period.

Amid monetary policy shifts by major economies, the BOK is widely expected to further raise the policy next year to curb inflation and household debt. The central bank hiked the key rate in August and November, bringing it to 1 percent.

Political uncertainty could also be a setback for the government’s management of the economic policy next year.

The successor to President Moon Jae-in will take office in May next year after the election in March. The Moon administration’s economic policy plans may not last, as the new president could adjust the economic policy directions for 2022 based on his campaign promise.

Lee Jae-myung, presidential candidate of the ruling Democratic Party, has openly criticized the finance ministry for opposing the provision of emergency cash handouts to all people.

The former governor of Gyeonggi Province, which surrounds Seoul, has long championed universal basic income and other sweeping welfare measures. He pledged to give up to 1 million won (US$840) to each citizen and an additional 1 million won to every young adult per year, if elected.

Yoon Suk-yeol, presidential candidate of the main opposition People Power Party, pledged tax reform in a bid to ease real estate taxes.

The political parties have floated the possibility of creating another extra budget early next year to support merchants who bore the brunt of tightened virus curbs. The country drew up two rounds of supplementary budgets totaling some 50 trillion won this year.

The National Assembly passed a record high of 607.7 trillion won in national budget on Dec. 3. If another extra budget is created, the government’s plan for fiscal spending and debt management will be inevitably affected.

“Depending on the outcome of the upcoming election, an incoming government will newly set the economic policy directions,” said Kim Jung-sik, an emeritus professor of economics at Yonsei University.

“But any new government is expected to continue to make efforts to create jobs, boost the competitive edge of exports and stabilize the housing market,” he added.