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(LEAD) OECD cuts growth outlook for S. Korea's economy to 2.4 percent

18:54 May 21, 2019

(ATTN: UPDATES with details in paras 5-18)

SEJONG, May 21 (Yonhap) -- The Organization for Economic Cooperation and Development (OECD) on Tuesday cut its growth outlook for South Korea's economy this year to 2.4 percent due to weak domestic demand and a slowdown in global trade.

The OECD's latest forecast represented a drop from its previous forecast of 2.6 percent in March. It said the South Korean economy would grow 2.5 percent in 2020, down from its previous forecast of 2.6 percent.

"Economic growth is projected to slow to around 2.5 percent in 2019-20, reflecting weakness in domestic demand and international trade," the OECD said in its economic outlook report.

South Korea's exports fell 2 percent on-year to US$48.86 billion in April, extending their on-year decline for the fifth consecutive month due to a protracted slump in chips and weak demand from China, which accounts for a quarter of its exports.

Adding to the economy's woes, the downturn in the semiconductor sector had a negative impact, as South Korea accounted for more than 60 percent of the world memory market in 2018.

The OECD said weaker economic growth is due in part to a decline in fixed investment and weak job creation, reflecting restructuring in manufacturing.

It also said South Korea should moderate minimum wage increases, noting that double-digit increases in the minimum wage are holding back job creation and further large minimum wage increases would reduce job gains and the competitiveness of South Korean firms if not accompanied by higher productivity.

South Korea raised its minimum wage to 7,530 won per hour in 2018, up 16.4 percent from 2017. The minimum wage has been raised by 10.9 percent on-year to 8,350 won per hour in 2019.

Critics claim the minimum wage hikes have increased the burdens on businesses, especially microbusiness owners and the self-employed.

Standard & Poor's, a global rating appraiser, also said last month that South Korea should rethink its stance on minimum wage if needed.

The OECD said growth will be supported by fiscal easing and a rebound in fixed investment in 2020, leading to GDP growth near South Korea's potential rate.

"If such an upturn fails to materialize, additional fiscal support will be necessary," the OECD said. "Fiscal stimulus should continue in 2020, accompanied by an easing of monetary policy, as headline inflation is well below the 2 percent target."

The Bank of Korea increased its main policy rate by 25 basis points to 1.75 percent in November 2018 and has kept it steady since.

The OECD said the 2019 supplementary budget will boost the South Korean economy.

Last month, the South Korean government proposed a 6.7 trillion-won extra budget to cope with an economic slowdown and fine dust air pollution.

Still, it remains unclear when the parliament might vote on the bill amid a deepening political standoff over the ruling party's attempt to fast-track four major bills, including one on electoral reform.

The OECD also said South Korea's key challenge is to raise labor productivity, which is only about half of that in the top half of OECD countries. It said South Korea faces the fastest population aging in the OECD.

In 2018, South Korea's total fertility rate -- the average number of children a woman bears in her lifetime -- hit a record low of 0.98, much lower than the replacement level of 2.1 that would keep South Korea's population stable at 51 million.



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