Bank of Korea Releases Economic Prospects for 2008

The Bank of Korea announced its projection that the Korean economy will grow no more than 4.7 percent next year.

The BOK said in its “2008 Economic Prospect” report released Wednesday, “The economy will have a harder time than expected because of the economic slowdown in the U.S. caused by the subprime mortgage meltdown, high oil prices and inflation.”

The 4.7-percent growth projected by the central bank is 0.1 percentage points lower than this year’s growth projection of 4.8 percent.

The bank also forecast that the economy’s balance of current accounts will post a deficit next year for the first time in 11 years since 1997, when it recorded $8.29 billion with the outbreak of the financial crisis.

By contrast, it estimates next year’s inflation at 3.3 percent, considerably higher than this year’s estimate of 2.5 percent. This increases the chances of stagflation, a combination of slow economic growth and inflation.

The BOK predicted, “The impact of the U.S. subprime mortgage crisis is expected to continue next year. And since oil prices are rising faster than expected, the burden on the economy will increase as well. The domestic housing market is also expected to remain sluggish.”

Against the backdrop, the bank forecast that growth rate of most sectors, including private consumption, facility investment and exports, will be lower than this year.

It estimates that facility investment will expand 6.4 percent, a drop from this year’s 7.6 percent, due to increasing uncertainties at home and abroad, and that exports will decrease to 10.3 percent from this year’s 11.3 percent.

The Bank of Korea also estimated the balance of current accounts to post about $3 billion in deficits, as the goods trade account surplus is expected to drop on increasing imports due to rising oil prices, while service, income and transfer balance deficits are expected to grow due to increasing overseas trips.

Private economic institutes are also moving to revise downward their growth projections for next year at around five to 5.2 percent, as economic conditions deteriorate at home and abroad.

Korea’s economic growth rate managed to record 7.0 percent in 2002, buoyed by a stimulus package in the presidential election. But the figure remained below five percent afterward, posting 3.1 percent growth in 2003, 4.7 percent in 2004, and 4.2 percent in 2005. After managing to rise to five percent in 2006, the figure dropped to the four percent range again this year.

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