KDI`s economic forecast

The nation`s economic forecast announced Thursday by the Korea Development Institute (KDI), the government think tank, is rather gloomy. In particular, the current macroeconomic indicators greatly deteriorated compared with four months ago. It means that Korea`s internal and external economic circumstances have worsened rapidly. For this reason, the current situation makes it difficult to predict full economic recovery in the second half of the year, as anticipated by the government.

The KDI report analyzed that the Korean economy is in a foggy situation. The economic growth rate has slid to 4 percent, inflation and unemployment rates rose to about 4 percent, thus realizing so-called triple 4 percent in major economic indicators. It is believed that stagflation is very likely amid the slowdown in economic growth and rising consumer prices.

Also, recovery of the domestic economy is uncertain, as the global economic prospects have deteriorated. Japan and the United States have downwardly adjusted their economic growth projections from earlier 2.5-3% and 2% to 1.5-2% and 1% recently.

Analysts said that uncertainties associated with structural unrest of the nation`s financial market, which is attributed to settlement of some insolvent companies affiliated with Hyundai and Daewoo groups, are hampering Korea`s economic recovery. The question of those companies, which are considered as percussion caps, will squeeze the nation`s economy as long as they remain unresolved.

The KDI emphasized consistency in restructuring the most. The economic slumps in Japan and the United States will further squeeze the Korean capital market, so the government is required to recover investor confidence through restructuring and focus on recovery of economic fundamentals and stability of foreign exchange and the financial market based on it.

The report also called for a massive restructuring of Hyundai Engineering and Construction, along with follow-up measures on existing deferment of corporate bankruptcies, such as underwriting of corporate bonds. However, the report was negative about additional interest cuts in the government`s monetary policy. Indicating that it is desirable to maintain the interest rate at the current level at a time when exchange rate increases lead to inflationary pressure, the institute opposed the intervention of authorities to prevent exchange rate fluctuations.

Kwon Soon-Hwal shkwon@donga.com