OECD Cuts Korea`s Growth Forecast to 4.3 Pct.

The Organization for Economic Cooperation and Development said yesterday that its forecast for Korea’s economic growth this year has been cut from 5.2 percent to 4.3 percent.

The OECD in a report on economic prospects in the year’s first half also lowered its growth forecasts for most of its 30 member nations, warning of a rapid slowdown in the global economy.

○ Gloomy Korean economy

The OECD lowered its forecast for Korea by 0.9 percentage point from late last year. Given its cut of an average of half a percentage point for other member nations, the organization reduced its forecast for Korea by a relatively wider margin.

The OECD’s economic forecast of 4.3 percent for Korea is far lower than those released by Korean think tanks such as the Korea Development Institute (4.8 percent); the Bank of Korea (4.7 percent); Samsung Economic Research Institute (4.7 percent); and LG Economic Research Institute (4.6 percent).

The message apparently is that global bodies are more pessimistic than Koreans over the country’s economy.

Kim Kwang-doo, an economics professor at Sogang University, said, “Global economic organizations including the OECD seem to believe that inflation resulting from the surging prices of oil and grain will negatively affect Korea’s domestic market.”

The OECD also predicted Korea’s private consumption will grow 3.2 percent, 1.1 percentage points lower than expected, and exports will rise 8.6 percent this year, two percentage points lower than the forecast made late last year.

Fixed investment by Korean firms will rise a mere 1.8 percent from a year ago, the report said, down from the initial forecast of 4.4 percent due to rapidly cooling investment sentiment. Facility investment and the number of building orders have decreased due to sluggish demand for housing, the OECD said.

The OECD forecast for inflation, however, rose from 2.8 percent to four percent and the share of the current account deficit in GDP will grow from 0.2 percent to 0.8 percent.

Increasing household debt is also seen as a threat to the economy since household debts, which accounted for 85 percent of income by 1998, soared to 150 percent late last year.

Despite disappointing economic indicators this year, Korea’s economy will grow around five percent next year, the OECD said, boosted by the Lee administration’s business-friendly policies.

○ Oil shocks to spread worldwide

The OECD lowered its economic growth forecast for member nations to 1.8 percent, down from 2.3 percent late last year.

Though the organization predicted late last year that U.S. growth will reach two percent this year, it lowered its forecast to 1.2 percent. Its forecast for growth in the euro zone also fell from 1.9 percent to 1.7 percent.

The OECD blamed the global economic slowdown on surging oil prices, sluggish housing markets and financial uncertainty resulting from the U.S. subprime mortgage crisis.

Though the subprime crisis has eased a bit, it could send shockwaves across the global economy if it cools the U.S. property market and pulls down housing prices. The surging oil and grain prices have heightened inflationary pressure, threatening economic growth. The OECD has increased its consumer inflation forecast for its member nations to 2.2 percent, up 0.1 percentage point from last year.

○ Need to cut state spending

The OECD advised that if governments want to boost economic growth, they should reduce state spending and implement tax cuts and reforms. Though support for private firms and individuals is important, reckless tax cuts or reforms could result in a lack of budget, the report said.

Private sector analysts said Korea should come up with measures to encourage corporate investment and stabilize consumer prices. If the government puts higher priority on growth or price stability, certain sectors are feared to suffer a serious blow.

Ju Won of Hyundai Research Institute said, “The government should stabilize prices via tax cuts and improvement of distribution channels for necessities. At the same time, however, it should strive to boost investment via deregulation and cutting corporate taxes.”

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