By Kim Tong-hyung
Korea’s economy will expand more slowly than anticipated this year as high fuel costs, weak consumption and mayhem in the world’s financial markets rattle the country’s fragile recovery, the Bank of Korea (BOK) said Monday.
Asia’s fourth-largest economy will likely expand 3.5 percent in 2012, lower than the 3.7 percent projection it made in December, the central bank said in its revised 2012 economic outlook.
Gross domestic product (GDP) grew 3.6 percent in 2011, which represented a significant shaving from 6.2 percent in 2010, as the country struggled to cope with a depressing combination of higher prices and slowing economic activity.
Consumer prices were expected to rise 3.2 percent this year, lower than the bank’s previous estimate of a 3.3 percent gain.
The BOK’s renewed forecast doubled as a confession that the headwinds facing the economy were becoming stronger.
Sluggishness in major markets like Europe, United States and China has badly exposed Korea’s reality as a one-trick export pony. And consumers aren’t ready to pick up the slack as family finances are stretched.
Last week, the Asia Development Bank (ADB) lowered its GDP forecast for Korea this year to 3.4 percent from its September projection of 4.3 percent.
While stagnant wages and higher costs of living have been putting an acute squeeze on living standards here, the BOK has been determined to keep borrowing costs at bay. Its rate setters voted unanimously to keep the policy rate at 3.25 percent for the 10th consecutive month last week, citing dismal conditions at developed economies and geopolitical uncertainty stoked by North Korea’s rocket launch.
Economic growth will likely accelerate next year to 4.2 percent, while consumer price inflation tames to 3.1 percent, according to the BOK. Core inflation, which excludes volatile elements like fuel and food, was predicted to rise 2.6 percent this year and 3.6 percent next year.
The growth in private consumption was forecast at 2.8 percent, down from the previous 3.2 prediction. Exports, which account for about half of the economy, are likely to grow 4.8 percent this year, a slower pace than the bank’s December projection of 5 percent.
The current account surplus will measure around $14.5 billion this year, up from its previous $13 billion projection, before narrowing to $12.5 billion next year, the BOK said. It expects 350,000 new jobs to be created this year and 320,000 in 2013, with the unemployment rate at 3.3 percent for both years.
Shin Un, director of the BOK’s economic data research division, has suggested that high oil prices will be the main culprit for the expected pullback in economic growth.
``On a quarter-to-quarter basis, (the economy will) grow at a rate of 1 percent during the first half of the year and within the low 1 percent range during the second-half of the year, rebounding from a dismal 0.3 percent rise during the fourth-quarter of last year and reflect a moderate improvement in economic activity,’’ said Shin.
``Consumption was worse than feared during the fourth quarter, when it declined by 0.4 percent compared to the preceding quarter, and this was reflected in our new forecasts. The hit on consumer spending has much to do with worsened trade conditions resulting from the elevation in fuel costs.
``During our predictions in December, we calculated the affects of the expansion of state-financed school meals, but not the government subsidies on childcare. The childcare support alone takes 0.3 percent point off the headline inflation figure, but this was offset by the rise in fuel prices. When we announced our predictions in December, we were expecting crude prices to stabilize at around $102 per barrel, but we are now expecting $118 per barrel.’’
Policymakers are chiefly concerned about the murkiness in Europe, which is bracing for the possibility its debt crisis takes a turn for the worse due to the troubles in Spain. Confidence is not being inspired by the United States, where the job and housing markets remain weak and fiscal austerity measures are beginning to bite harder.
Official figures have pointed to a sharp decline in the country’s trade surplus during March, confirming that dismal global conditions are hitting exporters in the back of their heads.
The air continues to escape from private consumption as well as consumers find their spending capabilities crippled by historic levels of personal indebtedness, persistently high inflation and unemployment. At around one quadrillion won, the country’s household debt mountain now matches an entire year’s GDP.
While the consumer price index (CPI), the country’s key measure of inflation, hit a 20-month low of 2.6 percent in March, this had more to do with the ``base effect’’ created by the outrageous price levels of 2011 and one-off factors like childcare subsidies. Rising household bills for fuel, food, rent and utilities suggest that living standards have been getting worse instead of better.
After reaching an 11-month high in February, Korea’s unemployment rate declined 0.6 point to 3.7 percent in March. Still, this is hardly comforting when more than 40 percent of the country’s working-age population remains sidelined from the labor market.
Young people are bearing the brunt of the downturn, with the unemployment rate of those between 15 and 29 measured above 8 percent. And more than 60 percent of the new jobs went to people in their 40s, 50s and 60s, showing that the employment rate continues to be padded by low-paid, casual jobs.
``The easing of uncertainties related to the European debt problem is a positive factor for growth. The downside factors include the downward revision of global economic growth rates and higher oil import prices,’’ the BOK said in a statement.