KDI expects 3.7% economic growth

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KDI expects 3.7% economic growth


Thanks to a robust growth in exports, the Korean economy is forecast to grow 3.7 percent this year, but a number of risk factors pose a threat to the gradual recovery, said a state-run think tank in its first-half economic outlook report yesterday.

The Korea Development Institute said it kept its previous forecast for this year’s economic growth at 3.7 percent, unchanged from last November.

But some analysts say the institute’s newest projection of growth is 0.2 percentage points lower than the previous estimate because it is based on a new national GDP calculation method that was introduced earlier this month.

The forecast is lower than the central bank’s latest prediction of 4 percent, which was made in April.

It is also less than the 4 percent expected by the Organization for Economic Cooperation and Development (OECD).

The institute’s positive outlook for the economy mainly stems from decreasing uncertainties in the macroeconomy at home and abroad.

Owing to overall global growth this year, the country’s exports are estimated to rise 6.1 percent by the end of the year, while imports will climb 5.8 percent, the report said.

The report also predicted that the country’s current account balance will generate about $78 billion in surplus, a similar level as last year.

“As both internal and external conditions improve and capital goods prices fall due to the Korean currency’s appreciation, facility investment in the domestic market is expected to jump 8 percent this year,” the report said.

But the think tank projected a fall of 2.8 percent in construction investment.

It also cut this year’s inflation forecast to 1.6 percent from the previous 2 percent.

Although the institute said the Korean government has no need to change its current fiscal and monetary policies, it advised the administration to make pre-emptive efforts to reform chronic problems in the economic structure.

The current slowdown in private consumption is expected to be a major drag on this year’s economic growth, the report warned.

According to the Bank of Korea yesterday, the Consumer Sentiment Index recorded 105 this month, its lowest in eight months. The dire result was due to the Sewol ferry sinking tragedy on April 16, which caused consumers to refrain from spending in the past month.

“Although private consumption will gradually expand, its growth rate will remain below GDP growth rates,” said Kwon Kyu-ho, a researcher at the institute.

The KDI forecast that private consumption will increase 2.7 percent this year, up from 2 percent last year, largely due to a rising gross national income and the Korean won’s appreciation, which will lead to greater purchasing power.

The report pointed out that the government has been unable to resolve the long-running household debt problem and restructure underperforming corporations.

Such risks make the economy vulnerable to unexpected external shocks, according to the KDI report.

“If any shocks are made to the financial market, the problems can turn into risks to the economy,” the think tank said.

The falling profitability of underperforming companies will undermine the economy’s resilience, the report added.

Growing debt at major public institutions is also a huge problem for the economy, the institute underlined.

“The government should carry out the debt restructuring of public institutions constantly in order to restore fiscal soundness in the public sector,” said the report.

“The costs incurred should be explicated and the right parties should take responsibility for them.”

With regard to recent worries about the won’s sharp appreciation, the institute said the currency would likely appreciate by an average of 6 percent this year in terms of the real effective exchange rate, which is unchanged from its previous projection.

BY SONG SU-HYUN [ssh@joongang.co.kr]

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