Is 4.5% growth target assailed?

By Kang Seung-woo

The Korean economy is rattled the U.S. recession and Europe’s debt crisis, which is expected to eventually cause Korea to miss the government’s growth target, market watchers said Tuesday.

Since Standard and Poor’s downgraded the credit rating of the United States by one notch Saturday from AAA to AA+, due to concerns over its debt and its ability to handle it, the local financial markets have been hit hard, with the Korea Composite Stock Price Index (KOSPI) losing ground for days.

The government earlier this year forecast the nation’s economic growth at 5 percent for 2011 but lowered that estimate to 4.5 percent in June. Now, it is no longer unthinkable that Korea, the fourth-largest economy in Asia, may fall short of 4-percent growth.

“Any harsh slowdown in the U.S. Economy is unlikely, but the world economy is struggling, so Korea’s second-half economic growth is expected to slow. Taking the situation into consideration, the government’s target of 4.5 percent is out of the question,” said Shin Suk-ha, director of an economic analysis team at the Korea Development Institute (KDI), whose prediction for the nation’s economic growth was 4.2 percent.

“As the financial markets have been hit hard, how much further the real economy will decline is the key issue.”

Observers say that confusion in the global financial markets may eventually affect the nation’s exports and weigh on consumer and investor confidence.

“There is a possibility that the economic growth is likely to be readjusted downward due to the current market rout sparked by last week’s U.S. credit downgrade,” said Lee Geun-tae, a research fellow at the LG Economic Research Institute (LGERI).

LGERI forecast earlier this year that the nation will mark 4.1 percent in GDP growth.

“It is too early to reach a conclusion, but the economic growth is likely to be lower.”

Nomura Securities also said in last month’s report that amid sluggish domestic demand, weakening exports can derail Korea’s economic expansion. It predicted that the country will put up 3.5 percent in GDP growth for this year, along with 3.3 percent and 3.6 percent, respectively, for the third and fourth quarters.

Korea’s export-heavy economy rose at the slowest pace in six months in the second quarter, as export gains sharply eased amid global economic uncertainty.

It grew 0.8 percent in the period, down from a 1.3-percent quarter-on-quarter expansion in the first quarter.

There are some who predict that the Korean economy could play up to the government’s forecast.

“Exports are showing solid growth so far this year, and domestic demand is also sound,” Kim Jong-soo, a researcher at NH Investment and Securities, was quoted as saying by Yonhap. “Economic growth of above 4 percent is attainable.