IMF downgrades forecast of Korean economy

The International Monetary Fund (IMF) has downwardly adjusted its estimate for this year`s growth rate of the Korean economy to 3.5 percent, which reflects that the overseas perspective about the Korean economy is cooling off quickly.

First of all, the IMF`s projection of 3.5 percent in Korea`s economic growth rate is significant. The projections by the Korea Development Institute (KDI) and other major economic research institutes in Korea are at the 4 percent level. In particular, the IMF cut its growth rate projection by nearly half just six months from its 6.5 percent projection in October last year.

It was speculated that the IMF sees the Korean economy in a pessimistic way because of the slowdown in the economic activities of Japan and the United States, which have great influence on the Asian economies, including Korea. The fund lowered its projections for economic growth in Japan and the United States from last fall`s 1.8 percent and 3.2 percent to 0.6 percent and 1.5 percent.

If Korea`s growth rate slides as the IMF anticipates, the future of the Korean economy will be even gloomier.

The unemployment unrest, which already reached a critical point, will grow further. If the economic growth rate drops 1 percent, it will make 60,000 to 70,000 people jobless, according to an analysis. Considering the pressure from the hike in import prices, resulting from the won`s depreciation, it won`t be easy to hold consumer price inflation at the 4 percent level. And the possibility of stagflation is growing.

The economic management of the government would be even tougher with critics raising their voices to demand measures to boost the economy. But any artificial economy-boosting measure might result in soaring consumer prices.

Nevertheless, some analysts point out that economic planners need not to be sensitive to the IMF`s downward adjustment of the growth rate projection. Chung Moon-Kun, executive director of Samsung Economic Research Institute, said that it is not the worst scenario considering industrial activities during the first quarter, noting that the IMF has excessively under-evaluated the Korean economy.

``As of now, we will stick to our original projection of 4.5 percent.`` he said.

Kim Joon-Il, head of the KDI`s macroeconomic research team, said that it would be difficult for any institution to make an accurate prediction due to uncertainties of U.S. and Japanese economies.

Kwon Soon-Hwal shkwon@donga.com