Korea lowers growth target to 4.5 percent

Forecast for inflation raised to 4% from 3%

By Kim Tong-hyung

After months of putting growth before inflation, the Lee Myung-bak government has readjusted the direction of the nation’s economic management.

In a much-anticipated news conference Thursday, the country’s economic ministers and vice ministers of labor, welfare and land gathered to unveil a set of measures to contain the inexorable rise in the cost of living and halt the damage to savings and spending power.

The country’s annual target for economic growth was lowered from 5 to 4.5 percent and the forecast for inflation was lifted from 3 to 4 percent, an adjustment that perhaps marks the beginning of the end for the growth-first “MBnomics.”

In announcing the new range of government policies, the senior policymakers vowed to stem increases in public utility bills, tame service sector prices and improve financial support for low-income families, who are experiencing an acute squeeze in living standards.

They also promised sterner regulatory clampdowns on anti-competitive behavior of companies attempting to exploit inflation expectations by ripping off consumers. Lowering taxes on oil products, however, was among moves that were ruled out.

It remains to be seen whether the government’s change in direction will influence interest rate setters at the Bank of Korea (BOK), who have been reluctant to suppress the money supply, judging the economic recovery is too fragile to withstand an immediate increase in borrowing costs.

“Inflation, jobs, consumption and a social safety net are the key themes for the economic policies in the second-half of the year as they are directly connected to improving the lives of low- to middle-class families,” Bahk Jae-wan, minister of strategy and finance, told journalists at the Gwacheon government complex.

“The top priority is regaining stability in prices and our commitment to this is represented by the decision to lower the growth forecast by 0.5 percentage points. This is a prediction, not a target, and the government and private sector could work together to produce a result that exceeds expectations.”

These are extremely difficult times for economic policy with the country facing a depressing combination of higher prices and slow growth.

Inflation has been at least a point above the government’s previous 3 percent target every month through May, adding to the agony of Korean families struggling with stagnant wages and bloating debt.

Economic activity also appears subdued across the country. Consumption has been sluggish and the confidence of businesses sank to its lowest level in 18 months, according to a separate BOK report, as concerns rise over weak demand and the heady mix of negatives that face the world economy, most particularly the European debt crisis.

There have been fears that the future rises in utility bills and fuel costs will see inflation rise further. The Ministry of Knowledge Economy had previously advised families to prepare to pay more for necessities such as electricity, gas and water in the coming months, as the snowballing debt of utility providers could no longer be disregarded.

Government officials are also petrified over the effect of the imminent rise in fuel costs. Determined to maintain an easy monetary policy, policymakers have resorted to price controls instead. Eventually, the country’s four refiners, SK Energy, GS Caltex, Hyundai Oilbank and S-Oil, were forced into cutting gasoline and diesel prices by 100 won per liter for three months ending on July 6.

The government is hoping that refiners will extend their discount or at least resist immediately raising prices by the 100 won per liter margin.

Economists predict a 100 won a liter increase in petrol costs could add 0.2 to 0.3 point to the consumer price index (CPI), the official measure of inflation, making it a bigger factor than just about any other variable.

In Gwacheon, Bahk and Knowledge Economy Minister Choi Joong-kyung pleaded with energy companies to gradually implement their price hikes, saying that the firms should consider the significant decline in crude costs since April. Cutting oil taxes, however, isn’t considered as a serious option at this stage, they said.

“I believe that the refiners will find a rational way to prevent consumers from receiving a shock at the pumps. The government, refiners and gas stations — we all need to make efforts,” said Choi, adding that he didn’t mind if refiners felt pressured by his comments.

“Reducing oil taxes could be considered as a contingency plan only if international oil prices soar to a level beyond $130 a barrel. We are currently discussing with the finance minister over possibilities of lowering the tariff quota on crude.”

Choi also expects the rise in electricity bills, which could be announced in August, will be suppressed below the trajectory of consumer price inflation. The hike in gas prices, which was planned for July, was pushed back to sometime after August, he said.

It would be ideal if the increase in power and other energy-related costs is suppressed below the average rate of inflation over the past three years, which is 3 percent, said a senior finance ministry official.

The downgrading of the country’s growth projections had long been expected with most influential think tanks, including the International Monetary Fund (IMF), predicting 4-4.5 percent growth for the country.

The government’s 5 percent target was based on an assumption that the prices of crude would stay around $85 per barrel, a prediction that was obliterated by the political unrest in the Arab world earlier this year.

The finance ministry still expects Korea’s recovery to get back on track, predicting 5 percent growth for the second-half of the year. The growth estimate for the first six months of the year was measured at 3.9 percent.