Overseas Forecasts Predict 5~6% Growth in Korean Economy Next Year While Domestic Forecasts Remain at Four percent

Foreign investors are making positive forecasts, saying that the Korean economy will grow at five to six percent next year, while domestic experts maintain their negative prospects about the economy, expecting it to stay at four percent, according to a recent survey.

Foreign investors pointed out such positive factors as the strong fundamentals of the Korean economy and increasing exports. However, domestic experts believe that the current political uncertainty and the risky credit rating in the household sector will hamper economic growth.

Why the difference of opinion? Overseas investment companies rely mostly on official figures, while Korean economic research institutes focus more on psychological and external factors.

According to Robert Subaraman, an economist at Lehman Brothers, “Based on historical trends in the economic cycle of Korea, it typically recovers within six months after showing good export figures. In spite of the manufacturing industry problems and some credit risks, the fundamentals of the Korean economy are still in good condition.”

However, the managing director of the Samsung Economic Research Institute, Jung Moon-gun, said, “During past economic crises, such as the foreign currency crisis and the collapse of the IT industry bubble, government and household sectors remained as steadfast economic players. However, after the recent credit bubble burst, corporate, government, and household sectors all became too weak to be able to rely on the past economic recovery cycles.”

Bank of Korea’s General Research Team Assistant Director Jang Min said, “Domestic research institutes tend more towards reflecting psychological indexes, such as political situations. Whereas the positive overseas forecasts were released rather recently, the domestic ones came out mostly in September and therefore did not take into account the growth in exports that has taken place since October.” Since September, most overseas investment institutes anticipated that the Korean economy will grow at five to six percent next year, thanks to the boosting global economy.

The U.S. investment bank Lehman Brothers forecasted the highest growth at 6.5 percent, compared to 6.0 percent by Goldman Sachs, 5.5 percent by Salomon Smith Barney and 5.0 percent by Deutsche Bank. According to their predictions, the Korean economy will climb from its low two to three percent growth this year to five to six percent growth next year. Such international institutes as the International Monetary Fund (IMF) and Organization For Economic Cooperation and Development (OECD), which depend mostly on Korean sources for their economic forecasts, published relatively low growth forecasts of 4.8 and 4.75 percent, respectively.

On the contrary, major economic research institutes including Korea Development Institute (KDI) (4.8 percent), Hyundai Economic Research Institute (4.4 percent) and Samsung Economic Research Institute (4.3 percent) stayed with the forecast of 4 percent level growth. Only Financial Research Institute (5.8 percent) and LG Economic Research Institute (5.1 percent) came up with the forecast of five percent level. The difference between Lehman Brothers and Samsung Research Institute in their forecast for the Korean economy next year surprisingly comes to 2.2 percent point.

Joong-Hyun Park Suk-Ho Shin sanjuck@donga.com kyle@donga.com