Korea ups growth forecast to 2.7%

The government said on Thursday that it revised its annual growth projection to 2.7 percent this year, and is able to hit the mark through a “policy mix” of fiscal and monetary stimulus.

Deputy Prime Minister and Finance Minister Hyun Oh-seok said that it would make sure to put its set of stimulus measures, including extra spending, into action “with great speed” to break free from the low growth trap.

The Finance Ministry changed its growth forecast from its initial “baseline” estimate of 2.3 percent early this year. Korea is looking at 3 percent growth in the second half of this year. Its target for 2014 is getting back to 4 percent traditional growth.

Fiscal spending, housing revitalization and investment promotion measures are expected to fuel growth, while the Bank of Korea’s rate cut and increased credit facilitation for small and medium enterprises in May will further boost the economy, government officials explained.

The government’s supplementary budget of 19.3 trillion won, including 2 trillion won in public funds will add 0.3 percentage point to Korea’s gross domestic product growth this year, and 0.4 percentage point next year, the Finance Ministry noted.

However, Korea’s economy still faces risks of performing well below the growth level achieved before the global financial crisis in 2008 or its traditional growth of 4 percent amid growing uncertainties over the U.S. and China, the country’s two biggest trading partners.

Asia’s fourth largest economy had just seemed to find stability in the first half of this year, but signs of trouble are reappearing ahead as the U.S. prepares to end its monetary stimulus while a credit crisis looms in China.

Concerns whether Japan will be able to revive from two decades of stagnant economy and the eurozone’s prolonged debt crisis also pose downside risks to the Korean economy.

It also cautioned that domestic risks exist in addition to external risks related to uncertainties over the G2 economies.

Korea’s electric power shortage due to nuclear shutdown, high household debt, and sluggish private consumption and investment are key concerns that could put the brakes on its efforts to develop a creative economy and achieve its projected growth.

The government will increase risk management and monitoring of the markets to counter these negative variables, including capital-flow volatility on quantitative easing exit in the U.S. and a possible credit crunch in China.

Other revised projections for this year included employment rate of 64.7 percent from its initial 64.6 percent on the back of the government’s stimulus measures.

Inflation has been adjusted down from 2.3 percent to 1.7 percent this year.

Korea is forecasted to record a job rate of 65.6 percent and inflation of 2.8 percent next year.

The central bank has set the target of maintaining inflation between 2.5 and 3.5 percent in 2013-2015.

By Park Hyong-ki
(hkp@heraldcorp.com)