By Lee Hyo-sik
Staff Reporter
The South Korean economy will expand at a solid pace of 4.9 percent this year as increased business opportunities in China will offset a slowdown in the U.S., according to the United Nations Economic and Social Commission for Asian and Pacific (UNESCAP) Thursday.
The growth projection is higher than those of most major economic research institutes at home and abroad, but lower than the Lee Myung-bak government's target of 6 percent.
In its economic and social survey for Asia and the Pacific, the organization said the U.S. economic slowdown would hurt Korea's exports but a strong economy in China and a free trade agreement (FTA) with the U.S. coming into effect in 2008 would benefit the country's exporters.
It said private consumption will remain strong, having recovered from the bursting of the household credit bubble of 2004, while consumer confidence will stay rather buoyant this year due to rising household incomes.
But UNESCAP acknowledged that a major downside risk to the Korean economy is a severe downturn in the U.S. economy. ``In a worst-case scenario ― if the U.S. economy goes into a recession ― Korea and other Asian countries would feel the greatest effects due to their strong export focus,'' it said.
A 2001 slowdown in the U.S. economy led to a sharp contraction in U.S. import demand for consumer durables and their associated inputs, as well as machinery and equipment that led to a 0.8 percent cut in growth for Korea.
Also, a future U.S. slowdown may lead to financial losses from investments there, further reducing income, leading to a contraction of consumption as well as possible reversals affecting the local stock market, UNESCAP said.
``The country will post current account deficits this year as it has to pay more to import crude oil and other raw materials because of surging prices,'' it said. Outbound tourism and royalty payments on overseas patents have led to a deficit in the services account balance here.