Economists mixed on 6 percent growth target

Aside from his nickname “the Bulldozer” for his determination to get things done, President Lee Myung-bak dubbed himself the “Economy President” during his run for office.
To live up to the name, he promised to generate 7 percent annual economic growth in the coming decade, raise Korea’s per capita income to $40,000 and to help Korea become one of the world’s top seven economies.
Amid a swirl of gloomy economic signs on both the domestic and international fronts, however, Lee has adjusted the 2008 growth target down to 6 percent. It remains the highest prediction among a variety of institutions. If it is achieved, it will be the most robust growth since the economy expanded 7 percent in 2002.
The Bank of Korea predicted growth of 4.7 percent, which could be lowered further. BOK Governor Lee Seong-tae earlier this month suggested that economic growth will slow.
The latest average 2008 economic prediction for Korea from nine global investment banks, including JPMorgan, Lehman Brothers, Morgan Stanley, UBS and Citigroup, coincided with the central bank’s. And it is 0.3 percentage point lower than the average 5 percent projection compiled last August.
UBS presented the grimmest outlook. Switzerland’s biggest bank adjusted its 2008 economic growth forecast downward from 4.1 percent to 3.6 percent in late January.
“Korea faces challenges in 2008, and those challenges appear to be growing now that we expect a U.S. recession this year,” said Duncan Wooldridge, a UBS economist, in a report.
Export growth should slow in line with weaker demand from the United States, Europe and Japan. Demand in all of Asia is likely to shrink due to the strong influence of global export cycles on domestic economies, according to the report.
Oh Suk-tae, a chief economist at Citigroup Korea in Seoul, said that the year’s growth target of 6 percent set by the incoming administration is “not likely to be achieved.” He lowered his initial growth forecast from 5.2 percent to 4.6 percent at the end of January. But he said the forecast is still based on optimism for the Korean economy.
“We see the fallout from a sagging U.S. economy driven by the U.S. subprime crunch as limited. This is based on our belief that the local economy has been decoupled from the U.S. to some extent,” he said.
Kang Man-soo, who has been appointed Minister of Strategic Planning and Finance, a new ministry to be formed by consolidating the Ministry of Finance and Economy and the Ministry of Planning and Budget, recently admitted that the 6 percent target was based on the premise that the subprime fallout will ease.
To achieve the 6 percent target amid looming economic fluctuations and soaring raw material prices, especially for crude oil, Lee’s new administration pledged to implement tax cuts, including lowering the corporate income tax by 5 percent.
Lee also plans to ease the long-held ceiling on the stakes that non-financial firms can buy in banks, as well as let conglomerates invest more freely in their affiliates.
Additionally, Korea’s corporate community insists that the Lee administration should intervene in the market by lowering key rates. Recent research by the Korea International Trade Association, a leading business lobby, showed 58 percent of its member companies think an immediate cut in the key rate is necessary. The association says fixing impending cash shortage problems is crucial.

Korea left the overnight call rate target for loans to commercial banks unchanged at 5 percent in February, largely because of soaring consumer prices and inflationary pressure. For the past two months, consumer prices exceeded the central bank’s year-on-year target range of 2.5 percent to 3.5 percent.
Price hikes are increasingly weighing on Korean households. The consumer price index for basic necessities including food rose to a two-year high of 5.1 percent in January. Prices of some agricultural products and other food items jumped more than 50 percent.
In contrast to Korea, the U.S. Federal Reserve slashed interest rates by a historic 1.25 percentage points in a matter of eight days last month to stave off a possible recession caused by a depressed housing market and subprime-spawned credit upheaval. The Fed is expected to keep cutting rates if needed to combat the adverse effects of a prolonged housing slump and a severe credit crisis, as Chairman Ben Bernanke said in mid-February.
Economist Wooldridge of UBS said that the Bank of Korea may need to reduce key rates by 0.25 percentage point as early as the second quarter and then another 0.5 percent in the latter half of the year. That would lower the rate to 4.25 percent by the end of this year.
The Korea Institute of Finance advised that the central bank lower rates to prevent market instability stemming from wide interest rate differences with the United States.
“In light of foreigners’ rush to the local bond market, the Bank of Korea should cut the interest rate in a pre-emptive manner,” the think tank said in a report. “If the interest rate gap between Korea and the United States lasts for an extended period, it could become a destabilizing factor for the local bond market.”
Despite the bleak predictions, some analysts say Korea may benefit from the “Lee Myung-bak effect,” which may break through a variety of economic barriers.
Kim Chung-ho, president of the Center for Free Enterprise, said it is worth paying attention to the upbeat mood Lee’s election created across the nation. “Optimism is in the air. Although it is hard to translate it into exact figures, people can definitely feel it,” Kim said. “When the Korean economy posted 8 to 9 percent growth in the past, no one, even the computer-generated simulation program, predicted the country could achieve such a high figure.”
The Center for Free Enterprise is the Federation of Korean Industries’ research arm. The federation is a conglomerate business lobby group.
Kim added that up to 8 percent growth could be attained in four years, but only if the country opens its market further by taking chances, such as signing free trade agreements with the United States and Europe.
In a recent series of meetings with corporate leaders, Lee promised he would lift unreasonable restrictions in order to boost investment and form a more business-friendly environment. In a move to attract foreign businesses, Lee named David Eldon, chairman of the Dubai International Finance Center Authority, as head of a special committee for strengthening national competitiveness.
Kwon Goo-hoon, the senior Korea economist at Goldman Sachs, also projected Korea could achieve 7 percent growth this year.
“The initial 7 percent growth target set by the incoming government seems ambitious, although not impossible. It will require sweeping structural reforms, favorable external financing and deft handling of macroeconomic policy,” he said in a Feb. 11 report, where he stuck by his earlier forecast of 5 percent.
“We expect that the economy could grow at around 6 percent per year in the midterm [of the Lee administration] without jeopardizing macroeconomic stability, if it’s supported by timely investment deregulation and labor market reform,” Kwon said.

By Seo Ji-eun, Moon Gwang-lip Staff Reporters [spring@jooongang.co.kr]