By Yoon Ja-young
Staff Reporter
The International Monetary Fund (IMF) Sunday predicted that the Korean economy will contract by 1.8 percent this year. The latest IMF projection was a major revision from a 3 percent decline made last month.
The improved outlook comes against the background of the global economy finding itself on a recovery path.
In line with the IMF's upward revision, the Korean government is also moving to raise its growth outlook, saying the worst is over.
The fund maintained its outlook of 2.5 percent growth for 2010, noting that expansionary fiscal policies might be less effective next year.
It said uncertainties are lingering, pointing to the rising savings rate in developed countries that could lead to sluggish export markets, a recurrence of the global financial crisis and oil price hikes as downward risk factors next year.
The IMF said Korea is on a fast recovery track thanks to timely and comprehensive policy measures following the crisis in the fourth quarter of last year.
The Washington-based organization first estimated the economy to shrink by 4 percent in February, but raised this by 1 percentage point to 3 percent on July 7.
It added that Korea saw the most drastic economic fall of 5.1 percent in the fourth quarter of 2008, on massive capital outflow, falling asset prices and export declines.
The credit crunch, however, has eased upon successful policies and the current account surplus achieved through the weaker Korean currency and falling oil prices.
The IMF said the weak won eased deflationary pressure and helped the country record a surplus in the current account as imports fell.
The country's foreign exchange reserves, which dwindled by $38 billion in the fourth quarter last year, are also recovering.
The fund pointed out that economic indices, including exports, industrial output and services, have improved greatly compared from the end of the last year. It evaluated that the economy in the first quarter was stable.
The IMF made the announcement following a two-week consultation with the Korean government.