Inflation to Grow Faster Than GDP
By Lee Hyo-sik
Staff Reporter
The Bank of Korea (BOK) Tuesday predicted that inflation will grow faster than the economy in the second half of this year, with the current account deficit widening to a 11-year high of $9 billion this year.
It cut its second-half economic growth projection to 3.9 percent from an earlier 4.4 percent, with consumer prices growing at a faster rate of 5.2 percent, up from an initial forecast of 3.1 percent, as high oil and other imported commodity prices raise costs of goods and services here.
The current account deficit will widen to $9 billion, up from the initial projection of $3 billion. For the first time since the currency crisis in 1997, Korea will see the shortfall in the broadest measure of trade, services and certain government-to-government transfer account.
Such a downbeat forecast confirms that economic downturn is deepening. Many economists here have begun floating ideas that the Korean economy will fall into stagflation ― low growth coupled with high inflation ― in the second half of the year.
The central bank projected that Korea's gross domestic product (GDP), the total value of goods and services produced within the country in a given time, will increase 4.6 percent this year from last year, substantially lower than the government's growth target of 6 percent. The Ministry of Strategy and Finance is widely expected to cut its official GDP growth forecast to below 5 percent this week.
The BOK forecast the economy will grow 5.4 percent in the first six months of the year, up from the initial 4.9 percent estimate, boosted by stronger-than-expected exports.
``The latest projection draws a gloomier picture as the economy will unlikely recover any time soon because of surging oil prices and a global economic slowdown. Consumer spending will likely remain depressed for the foreseeable future, weighed down by high raw material costs,'' a BOK economist said.
He also said companies may be reluctant to make new investments and hire more workers.
Many research institutes also projected the economy will slow down sharply in the second half of the year from the first six-month period, probably at the steepest pace since 2003 when economic growth plunged in the latter six-month period in the wake of the credit card bubble.
SERI expected the GDP growth to fall to 3.8 percent in the second half from 5.5 percent in the first half, while the Korea Development Institute pushed down the growth rate during the July to December period to 3.8 percent, compared with 5.2 percent in the first half.
The IMF also projected the economy will expand 3.1 percent from July through December, down from the first half growth projection of 5.2 percent.
The central bank also said consumer prices will rise 4.8 percent in 2008 year-on-year, substantially higher than its inflation target of 3.3 percent. The first-half consumer price growth will likely reach 4.3 percent, it said.
A steep rise in consumer prices is attributed to skyrocketing crude oil prices and the weakening won against the dollar, the BOK said, adding prices will likely continue to climb at a faster rate.
``Because of tight global supply and speculative demand, crude oil prices will either remain high or rise even further from the current level. We will probably pay an average of $115 per barrel of Dubai Crude in 2008, $34 more than our initial forecast made early this year,'' the economist said.
Despite slowing economic growth, economists expect the central bank to freeze its key interest for the time being to curb rises in consumer prices. In June, the bank kept the rate at 5 percent for the 10th consecutive month.
With the nation paying more to import oil and other commodities, the central bank revised upward its forecast of the 2008 current account shortfall to $9 billion, sharply up from the initial $3 billion, the first deficit since 1997.
The number of newly created jobs is projected to reach around 190,000 this year, sharply down from the initial estimate of 300,000.
The BOK also expected private consumption to increase 3 percent from a year earlier, lower than the earlier 4.3 percent gain, while corporate investment growth will reach 4.4 percent, down from the earlier 6.4 percent.