Dismal growth prospects abroad likely to squeeze Korean economy

The government has been pushed to lower growth projections for the Korean economy as debt in Europe and dismal growth prospects in the U.S. are expected to set back exports and consumer spending this year and next.

The latest data shows that shrinking consumer demand and depressed business sentiment in the West are hurting the export-reliant economy already burdened by record high private sector debt and inflation. IT exports for August were down 11.8 percent by value compared with last year. The August trade surplus contracted sharply to $500 million, down $4.9 billion a month before.

Finance Minister Bahk Jae-wan last week said the government is likely to lower the growth projection for next year before the budget plan for next year is due later this month.

“The growth prediction could change when the government submits its 2012 budget plan to parliament,” Bahk said in an interview.

“After scrutinizing downside risks, the ministry will unveil the closest growth target as possible when it presents the budget plan to the National Assembly late this month,” the minister said.

The ministry had already offered a downbeat assessment of Asia’s fourth-largest economy on June 30 by lowering this year’s growth projection from 5 percent to 4.5 percent, backing off from its ambitious plan.

“Uncertainties and volatilities widened due to shrinking economies in the West. One of the most vulnerable to that is the IT sector where demand from advanced economies is high, and high level of household debt here doesn’t exactly help in general,” Yoon Chang-yong, an economist at Shinhan Investment Corp. said.

The Korean economy was one of the most battered in the past two months after credit rating agency Standard & Poor’s stripped the U.S. of its “AAA” credit rating for the first time.

Seoul stocks lost a net of 18.2 percent in August, by far the worst performance in the region.

The International Monetary Fund this week will release an updated World Economic Outlook to say that Europe and the U.S. had undermined prospects for a strong recovery in the West as well as in emerging markets.

Major think tanks and financial institutions have already factored in the dismal global outlook for the economy.

Standard Chartered First Bank Korea on Sunday lowered the country’s growth forecast for this year to 3.5 percent, cutting 0.4 percentage points from 3.9 percent projection made earlier.

“The cut in numbers reflects growing downside risks that are expected to exert negative pressure,” the bank said.

Korea Institute of Finance earlier this month made a 0.3 percentage cut to 4.1 percent in its growth projection for this year.

Hyundai Research Institute on Sept. 9 lowered its growth projection for next year to 4 percent, down from its 4.2 percent estimate for this year.

By Cynthia J .Kim (cynthiak@heraldcorp.com)