Economy Walking With a Limp in Korea

As the economic recession in Korea gets worse, there is a widespread gloomy economic outlook for the second half of the year. The state-run think-tank of the Korea Development Institute (KDI) on Wednesday cut the country’s GDP growth rate forecast from the initial 5.5 percent to 5.2 percent, citing the reduction in domestic consumption in the second quarter as the main cause. The domestic consumption had showed a sign of a sharp rally since the end of the previous year.

It is forecasted that despite flourishing exports, the economic growth rate for the second half of the year would remain at the 4 percent level due to stagnant domestic demand and slowdown in construction investment. The consumer price index was also raised from 3.1 percent to 3.5 percent due to high oil prices. The KDI is concerned that the current bleak economic signs could lead to a weakening growth potential and a prolonged economic slump.

U.S. investment bank Morgan Stanley also dropped Korea’s economic growth rate forecast for this year from 4.9 percent to 4.6 percent and for next year from 4.3 percent to 3.8 percent. Other financial institutions such as Lehman Brothers, UBS Warburg, Citigroup, HSBC and JP Morgan revised down its economic growth rate forecast for the country. As for domestic financial institutions, LG Economic Institute slashed this year’s growth rate forecast from 5.6 percent to 5.0 percent, and Samsung Economic Institute is expected to announce its revision sooner or later.

Song Tae-jeong, a researcher at LG Economic Institute, said, “Stagnation in domestic demand is one of structural problems of the country’s economy. Thus, this is the time to come up with measures for raising growth potential based on some principles.”

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