Economic growth expected to fall below 3% target

Korean economic growth will fall below 3 percent next year if the global economy remains sluggish, the Korea Development Institute (KDI) said on Wednesday.

This is a change in the earlier stance of the state-run think tank, which had been confident that 3 percent growth was possible.

The news comes as this year’s growth seems to be less promising than the Ministry of Strategy and Finance’s target, and many institutions, including the Bank of Korea, are looking at mid-2 percent growth.

At a press conference in Sejong City, the KDI said the economy might grow 3 percent, but it is based on the premise that the global economy will grow 3.6 percent as the International Monetary Fund (IMF) has projected.

“Many view that the IMF forecast is too positive,” Kim Seong-tae, a KDI research fellow, said. “If the global economic growth remains 3.1 percent like this year, the Korean economy will be able to grow 2.6 percent at the maximum.”

The average growth forecasts by 10 overseas financial institutions such as Citigroup and JPMorgan stood at 2.8 percent. Morgan Stanley has made the lowest growth estimate for Korea, at 2.2 percent.

Meanwhile, the Ministry of Strategy and Finance has made a 3.3 percent growth forecast for next year.

For this year, the think tank said the economy would grow 2.6 percent by the end of December. The institute made an earlier forecast of 3 percent in the first half of the year, but lowered its estimate due to worse-than-expected economic performance

The KDI said Korea’s exports would continue to decrease next year, while the domestic market would show a gradual improvement.

The total value of exports is predicted to decline by 2.3 percent compared to this year, the institute said. Total exports are estimated to be $541.1 billion next year, while imports will be $426.2 billion, making it difficult to reach $1 trillion in aggregate trade volume

Private consumption is expected to rise 2.5 percent, slightly improving from this year. Construction investment is projected to grow 5 percent. Facility investment will increase 3.5 percent, which falls short of this year’s 5.2 percent growth.

The impending interest rate hike in the United States and the slowdown in China are two major influences on the Korean economy, the institute said.

It would be better for the government to maintain the current loose monetary policy next year, while adjusting its expenditure plan and increasing tax revenue for better fiscal soundness, it recommended.

“The government has already tried out every possible short-term measure this year,” Kim said. “Now it should turn to structural reforms.”

The institute also urged the government to manage both corporate and household debt. Household debt alone reached 1,200 trillion won ($1.08 trillion) as of November.

The KDI said the government should guide debtors to pay back the original money together with interest in order to help them lessen the financial burden after retirement.

“Government policies should focus on risk management for the overall financial sector,” Cho Dong-chul, a senior economist at KDI, said. “The G2 risk is so big that it is difficult to predict. Financial soundness will be the most critical issue for the economy next year.”

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