Institute Says Growth Rate Will Shrink

“Already?” This would be the common response to the Korea Development Institute’s (KDI) economic outlook report released yesterday. The quarterly growth for Q1 in 2006 was 6.2 percent year-on-year, but the potential growth rate for the rest of the quarters is predicted go down gradually from 5.8 percent in Q2 to 5.1 percent in Q3, and to 4.4 percent in Q4.

Due to high oil prices and slowing down consumption increase, it is uncertain whether the recovery trend in Q1 would continue in the future. There is the possibility for the economy to shrink in the second half of the year.

The KDI revised growth projection for 2006 upward from the initial 5.0 percent to 5.3 percent, based on strong 6.2 percent growth in the Q1.

But current account surplus this year is estimated at $4.1 billion, which is lower by $12.5 billion than the last year’s figure and by $8.3 billion than the earlier projections. This was due to the strong won and high oil prices. It is even uncertain whether exports that are leading the economic recovery would remain strong. The KDI mentioned that given the modest slowdown in the growth in the U.S. and Chinese economies, it is uncertain whether there will be strong exports in the future as well.

But the Ministry of Finance and Economy predicted that there is little possibility of a double dip in the economy.

It explained that balanced recovery is showing up in domestic demand and export, so there is relatively less possibility of the Korean economy abruptly turning to negative growth in the near future.

Still, the Ministry of Finance and Economy do not deny that there can be a slow-down in the economic recovery if the external economic circumstances, such as exchange rate and oil prices, become unfavorable for Korea.

The KDI diagnoses that increases in investment have to continue in order for the current economic recovery to carry on in the future.

As for monetary policy, the KDI said that the government should stick to its plan to alter the current low interest rate policy, but should be considerate about when to increase the interest rate by taking into account prices.

Sun-Woo Kim sublime@donga.com