GDP growth to slow to 4.5 pct. next year: Bank of Korea

The Korean economy will record 6.1 percent growth this year, the highest in eight years, but will slow next year to 4.5 percent, the Bank of Korea said Friday.

In addition, price instability will continue with inflation expected to reach more than 3 percent next year and in 2012, fueling calls for raising the key interest rate to curb rising inflation.

In a report on economic prospects for 2011, the central bank said the economy significantly grew this year in strongly rebounding from the global financial crisis but will return to pre-crisis levels next year.

○ Most economic indicators to fall

If growth exceeds six percent this year as predicted, it will be the highest since 7.2 percent in 2002. The growth rate was 5.1 percent in 2007 but plunged to 2.3 percent in 2008 due to the global financial crisis and to 0.2 percent last year.

The Korean economy bounced back this year on the back of an export upswing and rebound from low growth last year.

The central bank said, however, that growth will slow to 3.8 percent in the first half next year and 5 percent year-on-year in the second half for an annual growth rate of 4.5 percent.

The growth prediction is lower than the government’s early target of about five percent but higher than or equal to forecasts by other domestic and overseas organizations such as the Organization for Economic Cooperation and Development (4.3 percent), the International Monetary Fund (4.5 percent) and the Korea Development Institute (4.2 percent).

The number of new jobs will decline from 330,000 this year to 260,000 next year. The current account surplus will fall from 29 billion U.S. dollars this year to 18 billion dollars next year.

Export growth will decline from 16.1 percent to 9.6 percent and facility investment from 24.3 percent to 6.5 percent.

○ Rising inflation

Unlike most economic indicators that will slow down or stagnate, consumer price inflation will increase from 2.9 percent this year to 3.5 percent next year and 3.2 percent in 2012. This is higher than the central bank’s target range of 3 percent plus or minus 1 percentage point for price stabilization.

Utility rates, TV reception fee and security deposits for house rental are expected to rise next year amid rising prices of international raw materials. In particular, inflation in the first half of next year could get as high as 3.7 percent year-on-year.

Core inflation, which excludes agricultural and oil products due to large price fluctuations, has remained at 1.8 percent this year but will increase to 3.1 percent next year.

An official at the central bank said, “This means prices will rise due to higher demand six to nine months after economic recovery,” adding, “With demand pressure increasing, the rate of inflation will remain in the mid-3 percent level.”

On the real estate market, Lee Sang-woo, head of the central bank’s research bureau, said, “Increases in housing rental fees are showing signs of affecting sale prices and this phenomenon will continue next year,” adding, “Housing prices in the provinces will significantly rise and the increases in Seoul and vicinity will be limited.”

cha@donga.com