July 18, 2018 / 2:13 AM / a month ago

South Korea cuts economic growth outlook, wage hikes seen choking jobs recovery

SEOUL (Reuters) - South Korea on Wednesday cut its economic growth forecast for this year, citing a feeble labor market recovery and global trade tensions.

In its bi-annual economic policy report, the nation’s finance ministry projected growth of 2.9 percent for this year, in line with the Bank of Korea’s projections and down from a 3 percent estimate in December.

“Apart from shipments of semiconductors, exports growth came to a halt and investment is shrinking,” said Do Kyu-sang, a director general at the ministry, said in a press conference. “The economy’s capacity to create jobs is weakening,” Do said.

South Korean policymakers are trying to drive a sustained return to growth rates that match the country’s potential after a 3.1 percent expansion last year, the fastest in three years.

The government fears steep minimum wage hikes may choke a labor market recovery, as businesses cap hiring in a blow to consumer spending. The hikes also come as exports, which posted stellar growth in the past year, lose steam amid an escalating trade spat between the United States and China.

On Saturday, the government-mandated Minimum Wage Commission said the minimum wage will increase another 10.9 percent next year to 8,350 won ($7.40) an hour, after a 16 percent increase in 2018.

With businesses slowing hiring, the government now sees the economy adding only 180,000 jobs this year, down from 320,000 estimated earlier.

To shore up domestic demand, the government plans to increase fiscal spending by 4 trillion won ($3.55 billion) within its existing budget by re-allocating money at some of its state-managed funds to infrastructure projects that create jobs.

However, to avoid running up additional government debt, an official at the ministry’s budget office said the finance ministry would not sell more treasury bonds.

In its outlook for the second half, the ministry also revised down projections for this year’s headline inflation to 1.6 percent from 1.7 percent, while cutting private consumption growth outlook to 2.7 percent from 2.8 percent.

Reporting by Hayoung Choi, Cynthia Kim; Editing by Sam Holmes

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