KDI raises 2017 economic growth estimate to 2.6%

A state-run think tank on Tuesday revised up its 2017 growth forecast for the South Korean economy by 0.2 percentage point to 2.6 percent thanks to a recovery in the world economy and an upturn in exports.

"We raised the forecast for the 2017 economy to 2.6 percent as exports improved at a faster-than-expected clip on the back of recovered global demand, and with investments likely to maintain its upbeat pace," Kim Seong-tae, a senior researcher at the Korea Development Institute (KDI), said in a press conference.

"But the upgrade does not mean that the economy gained a momentum to rebound. It just means that downside risks have been eased to some extent thanks to an uptick in the global economy."

In its earlier forecast released in December last year, the KDI had expected that South Korea would pull off 2.4 percent growth in 2017.

It was the first time since November 2013 that the think tank raised its economic outlook.

For 2018, the South Korean economy is predicted to post a 2.5 percent growth due largely to a slowdown in facility and construction investment, said the institute.

The KDI's revision came as recent positive economic data stirred up optimism in Asia's fourth-largest economy for the first quarter.

Hopes are high that the South Korean economy has entered an upside cycle on the back of robust exports and recovering domestic demand.

The country's exports posted positive growth five months in a row since November last year on stellar overseas sales of semiconductors led by recovering world trade. The stellar overseas sales of semiconductors also pushed up facility investment.

Retail sales also gained 3.2 percent on-month in February, a rebound from the consecutive drops posted for the November-January period.

Last week, the Bank of Korea upgraded its growth outlook to 2.6 percent from 2.5 percent for 2017.

The KDI report predicted that exports will expand 4 percent this year, spearheading the overall economic growth, a sharp turnaround from a 6.4 percent fall in 2016.

Facility investment will likely rebound to post a 4.3 percent on-year growth this year from a 2.3 percent drop in 2016, on the back of robust exports, while construction investment will slow down to grow 6.4 percent in 2017 from last year's 10.7 percent.

Private consumption, a key growth engine, is expected to advance 2 percent this year, slightly down from a 2.5 percent gain in 2016, due to the diminished effect of government-led consumption boosting measures. The South Korean government gave tax breaks on cars and arranged a nationwide sales event last year in order to encourage people to spend more money.

However, the think tank noted that economic growth will still face stronger downside pressures due to rising uncertainties at home and abroad.

"The South Korean economy may fall into a slump rapidly when trade protectionism spreads widely in advanced countries including the United States and geopolitical risks expand on the Korean Peninsula," said the KDI. "Escalating geopolitical risks may cause a financial crisis and dampen business and consumer sentiment, dragging down domestic demand."

To cushion the external and internal risks and uncertainties, the KDI said monetary and fiscal authorities have to take more flexible and aggressive actions this year as the new government will take office in May.

"Despite a modest economic recovery, the fiscal authorities have to play a major role in propping up the economy in the face of potential external and internal risks," said the think tank.

"Monetary policy needs to maintain expansionary posture this year until inflation reaches the target rate."

The central bank earlier set its target inflation at 2 percent, but consumer prices hovered round 1 percent last year due mainly to low oil prices.

The KDI estimated that inflation will hit 1.8 percent in 2017 but drop to the mid-1-percent range in the following year as oil prices are expected to stay around $54-58 for the two-year period.

But the think tank called for being prudent when the new government tries to map out a potential supplementary budget as a way to help the economy.

Moon Jae-in, the presidential front-runner of the liberal Democratic Party, earlier said he will devise supplementary budget of around 10 trillion won ($8.76 billion) to create more jobs if he wins the May 9 election.

"In principle, a supplementary budget is a short-term means to boost the economy," said Kim, the KDI researcher. "The world economy is in a more favorable state than we had expected five months earlier. I don't think there is an urgent need to draw up an extra budget right now."

In order to tackle mounting household debt, which surpassed 1,300 trillion won this year, the think tank called for tightening bank loan regulations -- the debt-to-income and loan-to-value ratios.

The government lowered such financial regulations on home-backed household debts in August 2014 in order to boost the real estate market and stimulate the entire economy. (Yonhap)