Korea mulling cutting 2011 growth forecast

The South Korea government is considering lowering its projection of economic growth in 2011 to around the upper range of 4 percent while upping its inflation projection to the upper range of 3 percent due to the rising oil prices, sources said Sunday.

The Korean government has been targeting around 5 percent economic growth this year while containing inflation at 3 percent, but mounting inflationary pressure is making it hard for the government to attain such goals.

“Unpredictable factors have cropped up like surges in oil prices and the outbreak of foot-and-mouth disease since the government unveiled its 2011 growth target late last year,” said an official at the finance ministry.

“The government is considering reviewing macroeconomic data by taking into account these factors.”

The government of President Lee Myung-bak, which earlier put more focus on growth before inflation, recently focused on maintaining price stability by declaring a “war on inflation” as rising price pressures are feared to undercut the livelihoods of low and middle-income families.

The government’s target of 5 percent growth has been criticized by experts as being too rosy, given the persisting economic uncertainty at home and abroad.

South Korea is facing growing inflationary pressure as rising oil and food prices and sustained economic growth are exerting upward pressure on prices. In March, consumer prices jumped 4.7 percent from a year ago, surpassing the upper ceiling of the central bank’s 2-4 percent inflation target band for the third month in a row.

The Bank of Korea revised up its inflation projection to 3.9 percent from its earlier estimate of 3.5 percent, citing high oil and raw material costs. The BOK’s growth forecast stood at 4.5 percent for 2011.

In April, the International Monetary Fund revised up its inflation forecast for South Korea to 4.5 percent.

The BOK said oil and vegetable prices, the main drivers of inflation, are widely expected to ease starting in the third quarter, but the underlying upward trend of inflation will continue into next year.

The central bank said the growth of core inflation, which excludes volatile oil and food prices, will likely exceed that of consumer prices at year-end, indicating that demand-pull price pressure will mount. The BOK forecast core inflation to shoot up to 3.3 percent this year.

The growth of the Korean economy quickened to 1.4 percent in the first quarter from three months earlier due to robust exports. 

But rising inflation risks began to erode domestic demand and people have yet to feel the full-fledged impacts of the economic growth as their purchasing power compared with income deteriorated.

The country’s gross domestic income, an indicator of the actual purchasing power, posted the first decline in 27 months in the first quarter. 

(Yonhap News)