Growth Rate May Plunge to 1.4%

With clear signs of an economic slump, major think tanks are lowering their projected economic growth rate for this year.

The Korea Development Institute (KDI) and the private LG Economic Research Institute said Sunday that they will announce the nation’s growth rate for 2003 below 4%, down from the previous 5%.

In particular, the Korea Economic Research Institute (KERI), under the Federation of Korean Industries (FKI), warned in a report that a prolonged war in Iraq and nuclear standoff with North Korea could cause the growth rate to fall 1.4% in 2003.

“Geopolitical risks such as possible war in Iraq and the North Korean nuclear threat have started to negatively impact the Korean economy,” Heo Chan-kuk, senior researcher at KERI, said. “Even if a war in Iraq comes to an end quickly, a persistent nuclear standoff with the North will likely pull Korea’s economic growth rate down to 3.5%.”

In a report on Korea’s recent economic trends and policy suggestions, KERI reported that the economy is slowing, considering slowing production, rising consumer prices, decreasing trade balance, and plunging stock prices. The institute projected that a worst-case scenario should be prepared because the economic condition is aggravating faster than expected. Experts concerned that the economic slowdown will persist since the nuclear threat shows no signs of resolution while war in Iraq is only a matter of time.

If both problems continue unresolved, the economy will likely face the stagflation of the 1970’s oil crisis, with consumption, investment, and exports decreasing, thereby leading to falling growth rate and surging oil prices.

KDI is expected to lower the projected growth rate for this year around April 30. “Even at the end of last year when projecting the growth rate of 5.3%, we expected that a worse economic condition would pull it down into the 4% range,” Cho Dong-chul, head of the macroeconomics team said. “Recent developments are showing negative signs.”

LG Economic Research Institute also forecasted at the end of last year that the growth rate for 2003 would reach 5.6%, but it is poised to lower the rate. Researcher Kim Ki-seung said that at the end of last year, they predicted the average oil price at $25 per barrel but economic conditions worsened and the economic policies of the new government are falling short of expectations. “The projected figure may be considerably lower when adjusting the growth rate in March,” he added.

Meanwhile foreign economic research institutes recently lowered Korea’s projected economic growth rate to 4%, including UBS Warburg and the Economist Intelligence Unit (EIU). They forecast that if the nuclear threat from the North persists, the government will have to draw up economic policies to stimulate the economy by slashing interest rates in the first half of the year and setting up additional fiscal policies in the second half.

Yeon-Su Shin Kwang-Hyun Kim ysshin@donga.com kkh@donga.com