IMF cuts 2010 growth forecast for Korea to 1.5%

The International Monetary Fund said yesterday that it had cut the 2010 growth projection for Korea to 1.5 percent from its earlier forecast of 4.2 percent.

According to the World Economic Outlook report updated from the January version, Korea`s real gross domestic product will contract 4 percent this year followed by a weak rebound of 1.5 percent growth next year.

The IMF`s grim forecast of 1.5 percent growth for 2010 is less than half of the 4 percent growth projection made by the Korean Finance Ministry. It is also significantly lower than the 3.5 percent projection by the Bank of Korea.

The IMF pointed to Korea`s heavy reliance on the global demand as the major reasons behind the drastic revision of its growth forecast.

"Global activity is now projected to decline 1.3 percent in 2009. ... This downturn represents by the deepest global recession since the Great Depression," the IMF report said.

"Given their extreme openness and high dependence on external demand, advanced economies in the (Asian) region - Hong Kong, Korea, Singapore, Taiwan - will also suffer."

The IMF raised concerns over Korea`s weakened corporate and household balance sheets.

"Vulnerable corporate and household balance sheets will exacerbate the impact of external shocks in Korea," it said.

With a 4 percent contraction of the economy, Korea`s consumer inflation will come down as low as 1.7 percent in 2009 from 4.7 percent in 2008, and unemployment rate will rise to 3.8 percent from 3.2 percent during the same period, the fund said.

The IMF drastically cut the forecast for world trade volume for 2009, predicting an 11 percent contraction rather than the earlier forecast of a 2.8 percent contraction. Imports in advanced economies will shrink 12.1 percent this year, causing exports of emerging economies to contract 6.4 percent this year, it said.

The IMF`s revision of the growth forecast signals that a recovery of the Korean economy will be weaker and slower than previously expected. The IMF`s view conflicts with the optimism sparked by a report by the Organization for Economic Cooperation and Development.

The OECD recently said Korea will make the fastest economic recovery in the world with a quick rebound in composite leading indicator. That came after an OECD prediction earlier of 4.1 percent growth in 2010.

"In my personal view, OECD forecasts are more precise than those of IMF, because OECD data tends to reflect domestic policies and issues more broadly," said Byun Yang-gyu, a research fellow at the Korea Economic Research Institute.

By Kim Yoon-mi



(yoonmi@heraldm.com)