Economy Forecast to Contract 5-8 Pct. in 1Q

The Korean economy is expected to contract five to eight percent in the first quarter of the year due to financial uncertainty and the global economic slowdown.

Korea Economic Research Institute and LG Economic Research Institute yesterday said GDP will likely contract more than five percent this quarter year-on-year.

If the first quarter sees negative growth, it will be the second straight since the fourth quarter last year (minus 3.4 percent) and officially put the Korean economy into recession.

In 1998, the economy contracted for four consecutive quarters -- minus 5.3 percent in the first quarter; minus 7.9 percent in the second; minus 8.1 percent in the third; and minus six percent in the fourth.

Heo Chan-guk, economic research director of Korea Economic Research Institute, said, “We’re adjusting our forecasts for annual economic growth on the assumption that the annual growth rate will fall to minus two to four percent.”

“The rate will probably fall to minus seven to eight percent in the first quarter due to grave uncertainty in the global financial market and sluggish exports.”

LG Economic Research Institute will release its adjusted forecasts next week, with research fellow Lee Geun-tae saying growth will drop to minus five to six percent in the first quarter.

Samsung Economic Research Institute and Hyundai Research Institute lowered their forecasts last month. Samsung predicted minus growth of four percent and Hyundai minus five percent.

Kwon Soon-woo, director of macroeconomics research at Samsung Economic Research Institute, said, “The Korean economy saw good growth of 5.8 percent in the first quarter last year. That means the growth rate will inevitably fall in the first quarter this year. We need to pay more attention to economic growth from the previous quarter.”

Government officials have hailed as positive news growth of domestic production in the mining and service industries in January this year. Most analysts, however, said it remains to be seen whether the Korean economy can rebound since the two industries grew in January due to the Lunar New Year’s holidays and sharp inventory adjustment.

parky@donga.com