Near-zero growth predicted in Q3

Economic experts and foreign investment banks say annual economic growth of 3 percent is no longer attainable for Korea, with rising concerns of near-zero growth in the third quarter compared to three months ago.

They say on-quarter growth in the three months to September is likely to be close to zero or even negative in the worst case as the eurozone fiscal crisis shows no sign of resolution and the global economic slowdown spreads to emerging economies such as China.

Korea’s on-quarter gross domestic product growth more than halved in the second quarter to 0.4 percent, from 0.9 percent in the first three months of this year.

The country posted near-zero or negative quarterly growth in the aftermath of the collapse of Lehman Brothers in September 2008.

On-quarter growth went from 0.4 percent in the second quarter of 2008 to 0.2 percent in the third quarter, -4.6 percent in the fourth quarter and 0.1 percent in the first quarter of 2009.

Huh Jin-wook, an economist at Samsung Securities, said he expects the Korean economy to grow between 0.1 and 0.2 percent in the third quarter compared to the preceding three months.

“If there is no government stimulus for domestic demand, there is a possibility it could turn negative,” he said.

The slowing growth stems mainly from sluggish domestic demand and a decline in exports.

July exports shrank 8.8 percent from a year ago to $44.6 billion, marking the sharpest drop since October 2009.

Bank of America Merrill Lynch said Korea’s annual growth could fall to as low as 1.8 percent. This means the third-quarter growth would be negative compared to the previous quarter.

The investment bank said the possibility of recession in the eurozone, China and the U.S. would be a risk to the Korean economy.

Analysts in other major foreign investment banks, Korea’s leading private think tanks and the Federation of Korean Industries also project that growth in the second half of this year is unlikely to pick up significantly from the second quarter.

The Bank of Korea early last month trimmed its annual growth forecast to 3 percent, down from 3.5 percent. But the market consensus now is that it will be in the 2-percent range.

Ten foreign investment banks’ average outlook for Korea’s growth this year dropped to 2.9 percent late last month, according to the Korea Center for International Finance.

Nomura Securities and BNP Paribas recently lowered their outlooks to 2.5 percent. Barclays revised it twice to 2.7 percent, Citigroup 2.8 percent, JPMorgan and UBS 2.9 percent.

“Growth of 3 percent is hard to reach when domestic demand and exports are both weak at the same time,” said Oh Suk-tae, an economist at Standard Charted Bank Korea.

“To escape from the long-term low-growth phase, there is no way but to rely on each country’s economic stimulus policy.”

In order to reach annual growth of 3 percent, third-quarter and fourth-quarter growth must be around 1.2 percent and 1.3 percent on-quarter, respectively, according to LG Economic Research Institute.

Near-zero growth on-quarter would exacerbate employment and the household debt problem.

“Restructuring in businesses and households will be inevitable if the economy doesn’t grow from the previous quarter,” said Shin Min-young, head of the macroeconomic division at the LG think tank.

“Hiring conditions would worsen and households would go bankrupt. Social problems such as crime and divorce would also increase.”

By Kim So-hyun (sophie@heraldcorp.com)