KDI Strengthens Case for Exit Strategy

By Lee Hyo-sik

Staff Reporter

The Korean economy has been on a solid recovery path on the back of a continuous run of strong exports and reviving private consumption, the state-run Korea Development Institute (KDI) said Tuesday. However, it is another question whether the government and the Bank of Korea (BOK) are taking it as a sign to withdraw the extraordinary expansionary policy steps.

The think tank has been calling on the central bank to hike its key policy rate in a bid to curb a possible real estate bubble and other side effects from its accommodative policy stance, while urging the government to slash fiscal spending aimed at bolstering domestic demand.

However, Strategy and Finance Minister Yoon Jeung-hyun and other senior policymakers have vowed to maintain expansionary policies for the time being to facilitate an ongoing economic rebound. In a meeting with Yoon Monday, new BOK Governor Kim Choong-soo pledged to increase policy cooperation with the finance ministry, hinting that he will keep the key interest rate at its record-low level for some time.

On Thursday, the BOK announced that it is widely expected to leave its benchmark seven-day policy rate untouched at 2 percent for the 14th consecutive month. The rate has been frozen since March of last year, putting the brakes on a monetary easing cycle that trimmed it by 3.25 percent since October 2008 in the aftermath of the global financial crisis.

"Industrial production and service sector output grew at a faster pace in February, adding to the optimism that the Korean economy is in a stable recovery mode. Additionally, consumption-related indicators also point to a quicker rebound," a representative from the KDI said.

According to Statistics Korea, industrial production jumped 19.1 percent in February from the same month last year, marking a year-on-year rise for eight consecutive months. In January, the output surged 36.9 percent from a year ago, the largest expansion since July 1976 when it soared 38.8 percent. The service sector output grew 7.1 percent from a year earlier.

Exports also surged 36.6 percent to $101.6 billion in the first quarter from the previous year, much higher than the BOK's modest estimate of 13.5 percent.

The KDI reported that the job market is showing signs of an improvement in recent months, with the number of employed jumping by 125,000 in February from the same month last year.

Touching on the world economy, the institute mentioned that there are still a host of downside risks abroad, including growing fiscal debt engulfing the U.S. and other advanced countries. "But emerging economies are leading the worldwide rebound. At the same time, the U.S. economy is gaining an upward momentum on improving private consumption, corporate investment and exports. Its tight job market has also begun easing," the institute said.

The think tank then concluded that rising oil and other commodities prices in line with an economic recovery are gradually fueling inflation across the globe. "International organizations are rushing to revise upward this year's growth outlook. But due to the continued sluggish labor market in advanced countries and their snowballing fiscal debts, it will be very unlikely for the world economy to post a solid expansion in 2010."