Will The Economy Worsen Next Year?

A set of warnings predict next year’s economic growth rate will get even lower, around three to four percent, than this year’s, which means Korea may not be able to escape the “swamp of low-growth” for three years in a row.

Morgan Stanley, an American investment group, adjusted Korea’s predicted growth rate for next year from the previous 4.3 percent to 3.8 percent. The group is the first organization among major domestic and international research institutions to predict next year’s growth rate at the three percent level.

Prior to this, Citigroup lowered by a great degree its predicted rate from 6.0 percent to 4.5 percent; the multi-national stock service firm CSFB lowered its projection from 5.7 percent to 4.2 percent; HSBC lowered its projection from 5.7 percent to 4.3 percent.

The Bank of Korea (BOK) is also predicting that the growth rate will decline to the four-percent level in the fourth quarter this year from October to December, and that the next year’s average rate will halt at the four-percent level.

According to a survey conducted by Dong-A Ilbo recently, heads of 10 major national economic research institutes predicted that next year’s growth rate will average 4.5 percent.

If next year’s growth rate halts at the four-percent level, the low growth rate of lower than the mid five-percent level will keep its course for three years in a row following 2003’s 3.1 percent and 2004’s 5.2 percent (as estimated by the BOK).

The basis of this pessimistic view is that the export increase rate, the driving force of the Korean economy, has been slowing down this year, and that the outer environment will be likely to worsen as well.

The Korea Development Institute (KDI) predicted that the export increase rate in the fourth quarter of this year will drop to the 10-percent level due to the technical reaction to the good export economy late last year.

In addition, the prediction that economies in advanced countries, with the U.S. in the center, will be dulled, and that the tight-money policy of the Chinese government is likely to be actualized are casting a shadow over export prospects. The price drop of major export goods, including semiconductors and LCDs (Liquid Crystal Displays) is aggravating the export economy as well. The price of semiconductors dropped by 3.5 percent this month in its spot prices, and Samsung Electronics has lowered its LCD monitor panel price for exports to Europe by 20 percent. With signs of oil prices being on the rise again, it is another factor that is said to work against the world economy, including the Korean one. A related high official predicted, “If consumption and investment grow slowly, the growth rate will be around the mid or late four-percent level. If consumption and investment do not recover, the possibility of a three-percent level growth cannot be eliminated either.

Ki-Jeong Ko Joong-Hyun Park koh@donga.com sanjuck@donga.com