By Kang Seung-woo
Korea’s real economic growth is forecast to fall short of its potential next year due to the global economic slowdown, three private think tanks said Wednesday.
As a result, there will be little room for the central bank to raise its key interest rate.
According to Samsung, LG and Hyundai economic research institutes, the nation’s economy has shown a fast-paced recovery since the global financial crisis, but the slumping world economy, sparked by advanced countries’ debt crises, will put its inflation-adjusted gross domestic product (GDP) below its potential growth rate.
The Samsung Economic Research Institute (SERI) estimated that economic growth for next year will be 3.6 percent, compared with a 3.8 percent potential.
It said the GDP gap, which denotes the difference between potential and actual output, would be negative at 7.7 trillion won ($6.69 billion) next year, down from 2010’s 5.9 trillion won.
A positive GDP gap, where the actual amount exceeds the potential GDP, is called an inflationary gap and indicates the growth of aggregate demand is outpacing the growth of aggregate supply, possibly implying inflation.
A “negative” number, where an economy operates below its potential GDP, is dubbed deflationary, possibly pointing to deflation.
According to SERI, the nation’s GDP gap was 4.2 trillion won in the black in 2008, but it nosedived into negative territory at 29.9 trillion won in 2009 in the aftermath of the global financial crisis in late 2008.
Since then, Korea, Asia’s fourth-largest economy, saw a swifter pace in its economic rebound, narrowing the gap to 7.9 trillion won in 2010 ahead of 5.9 trillion won this year, the think tanks said.
“The slowing global economy will blunt Korea’s domestic demand as well as its exports,” according to SERI.
“It will take some time to offset the GDP gap.”
LG Economic Research Institute (LGERI) also predicted the gap will extend next year.
“Next year’s potential growth rate is estimated to be in the high 3 percent or low 4 percent range, but the real GDP rate will hover below 4 percent,” LGERI said.
The projection came after the finance minister hinted at lowering the nation’s 2012 growth target last month due to the ongoing downward risks.
The government forecast that the nation’s economic growth for next year will be 4.8 percent.
Meanwhile, the stretching deflationary gap is likely to prevent the Bank of Korea (BOK) from raising its benchmark rate, currently frozen at 3.25 percent for three straight months due to the declining global economy.
Hyundai Economic Research Institute (HERI) said, “Overall economic activities, including private spending, are expected to contract next year and the situation will make it difficult for the central bank to raise its rate.”