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Korea - The Australian - South Korea Forecasts Faster Growth Print E-mail

Wednesday, 24th June 2010

SOUTH Korea raised today its economic growth projection for this year to 5.8 per cent, from 5.0 per cent previously.

The finance minister went further to say that actual growth could top the latest projection which reflects the authorities' conservative outlook.

"We concluded that 5.8 per cent growth is feasible if we don't have further (negative) variables. It could top the (number) as we maintain a conservative stance," Minister of Strategy and Finance Yoon Jeung-hyun told reporters.

The government also flagged again a shift toward tighter economic policy to deal with inflation risks ahead. South Korea’s pledge to factor in inflation risks when conducting policies prompted economists to push forward their expectations on the timing of a rate hike by the Bank of Korea to as early as next month and sent treasury bonds lower.

"On top of the Bank of Korea's recent hints (of an imminent rate hike), the government today officially gave a signal that it's not against (a rate hike now)," Korea Investment & Securities economist Jun Min-kyoo said, predicting a hike in July or August.

In its twice-yearly report to announce its revised economic outlook and policy options released today, the Finance Ministry said it will "gradually normalise macroeconomic policy in accordance with employment, consumer prices and financial market conditions to the extent that the recent recovery trend is not harmed".

This clear and official nod to a shift in monetary policy has been well-flagged by chiefs of the Finance Ministry and the Bank of Korea in recent weeks.

It is also an indication that the government, which had questioned the domestic economy's ability to remain on the recovery path, has turned more confident now.

"The local economy and employment are showing a faster-than-expected recovery, while the private sector's ability to stand on its own feet has strengthened," the report said.

The government's revised outlook for the year matches the forecasts laid out by the Korea Development Institute and the Organisation for the Economic Co-operation and Development, which were among the rosiest external outlooks.
The state-run think tank projected a 5.9 per cent expansion this year and the OECD a 5.8 per cent rise.

The local economy expanded faster than expected in the first quarter, growing 8.1 per cent on year and 2.1 per cent on quarter. The government expects the economy to keep expanding for the rest of the year, although quarter-on-quarter growth is likely to slow to 1 per cent in the third and fourth quarters.

The ministry said gross domestic output in the second quarter is likely to increase by 6.3 per cent on year, while GDP is forecast to grow 4.5 per cent in the second half, and by around 5 per cent next year.

HI Investment & Securities economist Park Sang-hyun said the government's revised projection looks "feasible".

"The government acknowledges growth is sounder than thought and inflation pressures are increasing," Mr Park said, tipping the tightening to come in August at the earliest.

Mr Yoon Jong-won, director general at the Finance Ministry's Economic Policy Bureau, said at the media briefing the government expects the consumer price index to continue to grow in the 2 per cent range from June through August before climbing above 3 per cent from September.

"From September, inflationary pressures will appear and price stability conditions will be more difficult," Mr Yoon told reporters.

In the months to come, a fast rebound in consumption and investment will ensure contribution to economic growth from domestic demand will increase sharply, the government said.

The government pointed out that a potential increase in global fuel costs and public service charges as well as the economic rebound could cause inflation to accelerate.

The authorities will balance internal and external uncertainties with the growth outlook and the "need to act against the inflationary pressures pre-emptively" when it conducts policies, it said.

The government, which has spent more than half of this year's budget in the first six months, will evenly distribute the remainder over the next two quarters.

In the months to come, the US and Asian nations, including China, will lead the global economic recovery, while Europe is expected to lag, the finance ministry said.

China's recent decision to de-peg its currency from the US dollar will have a broad impact on Asia's fourth-largest economy, but any short-term impact will be limited as expectations of the move have already been factored in in the financial markets, it said.

(Source: The Australia, 2010)

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