Korea to see price rises outpace economic growth

Korea’s economic growth rate is forecast at far below the estimated inflation gain this year, data showed on Sunday, raising fears that the country might be entering an era of a chronically slow growth.

According to the data by the Korea Center of International Finance, 10 foreign investment banks predict that Korea’s 2011 economic growth is set to stand at 3.7 percent while their median projection of inflation is 4.3 percent.

As the country’s currently high consumer prices are widely expected to stabilize to 3 percent level next year, the growth rate would surpass the inflation figure in a way that lessens worries over any immediate danger of stagflation, but the latest data suggests Asia’s fourth-largest economy is navigating through a tough phase marked by sluggish growth and burdensome inflation.

The economy is forecast to grow by about 3.4 percent in the third quarter, following a 3.4 percent gain in the second and 4.2 percent growth in the first. Consumer prices grew faster, at 4.5 percent in the first quarter, 4.2 percent in the second and 4.8 percent in the third.

While most Asian economies such as China and Taiwan project their growth rate to be bigger than inflation this year, Korea and three other countries ― India, Thailand and the Philippines ― are likely to cope with the potentially toxic mix of slower growth and higher inflation.

“It seems South Korea is entering a low-growth phase amid the eurozone issue and slowing growth in China and the U.S.,” said Shin Min-young, a researcher at LG Economic Research Institute.

The protracted instability in the eurozone has been feeding anxiety among investors on the Seoul bourse, leading to frequent gyrations, while the local currency is selling under pressure against the greenback.

With consumer spending showing no signs of a pick-up, the Bank of Korea has been in a dilemma over striking a balance between a supportive policy line that bolsters the country’s growth and a much-needed step to rein in rising consumer prices.

The central bank kept steady the benchmark interest rate at 3.25 percent for the fourth straight month, while consumer price inflation has remained above the upper ceiling every month this year.

By Yang Sung-jin (insight@heraldcorp.com)