South Korea will spend nearly half of its annual budget in the January to March quarter, to help cushion the effects of slowing global demand.
The 44% allocation is the most in a decade and will be aimed at low-income earners and reactivating the economy.
Recent poll data shows rising anger at the government of Lee Myung Bak, over jobs and the rising wealth gap. Lee’s party faces two crucial elections this year.
Seventy percent of the budget will also be spent by the first half of the year, reflecting the widespread view that the global economy will improve in the second half of 2012.
Recent indicators suggest Asia’s fourth-largest economy slowed considerably in the final quarter of 2011, with factory activity shrinking the most in nearly three years in December.
The South Korean economy will likely face even more troubles early this year, as the eurozone’s fiscal crisis dampens demand for exports.
Seoul has cut its 2012 growth forecast from 4.5% to 3.7%, but some analysts say growth could slide below 3% as exports run off steam.
Samsung Securities’, Viktor Shvets, says Europe is heading for a recession, while the recent uptick in the U.S. economy may not be sustainable.
“A lot of that is due to much higher-than-expected personal consumption. We actually think that that’s probably not going to be sustainable as we progress into 2012. In terms of the eurozone, there’s no question it’s going to go into a recession as we go through 2012. The only question is the degree to which the industrial output – as well as economic growth rates in the eurozone – suffers, which in turn will be dependent very much on what the ECB (European Central Bank) does.”
Despite the slowing economy, high inflation continues to dog the economy.
With the Bank of Korea most likely keeping interest rates on hold for now, fiscal policy may be the most important tool to keep the economy on track.