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Government cuts economic estimate

GDP outlook for 2012 lowered to 3.7%, inflation likely ease to 3.2%

The government slashed its growth forecast for this year and next, backing off from its ambitious growth plan due to weakening consumption and persistent risk stemming from slumps in major economies, the Finance Ministry said Monday.

In a downbeat assessment of Asia’s fourth-largest economy, it said the economy will grow 3.7 percent in 2012, down from its 4.5 percent projection in June. It said inflation next year will ease to 3.2 percent from an estimated average of 4 percent this year as oil prices and farm products become stable.

The announcement follows similar downward revisions at the Bank of Korea and private think tanks, where consensus is now at the high-end of the 3 percent range for next year. Seoul’s forecast for next year is now the same as that of BOK’s, which projects growth to hit 3.7 percent under 3.3 percent inflation. The ministry expects the economy to pull off the 3.8 percent expansion this year.

The ministry said the 0.8 percent cut in 2012 growth outlook reflects “deepening uncertainty from the debt crisis in the euro zone, which will undermine demand for Korean exports and slow growth,” Choi Sang-mok, the director general of the Finance Ministry’s economic policy bureau told reporters prior to the release.

“Although we won’t put a number to it, we expect growth to accelerate in the second half of next year.”

Asked whether the slowing momentum would cause problems for Seoul’s plans to achieve fiscal balance by 2013, he said no, saying “the tax department plans to secure enough revenue with its efforts to reduce tax exemption programs.”

Seoul had initially estimated growth for this year to slow to 5 percent in the beginning of this year but lowered its outlook to 4.5 percent, and further to 3.8 percent.

The current account surplus is expected to narrow to $16 billion in 2012 from $25 billion estimated for this year, with export growth slowing to 7.4 percent due to slowing demand from abroad. The number of jobs created will fall from 280,000 from 400,000 this year.

The ministry turned rosy when describing overall private consumption, with a 3.1 percent forecast for next year, saying “the country’s real purchasing power will improve with continued job recovery and easing prices.” Facility investment is forecast to moderate with a 3.3 percent expansion next year due to worsening corporate sentiment. The housing market is expected to continue its struggle, with construction investment expected to increase by a marginal 2.9 percent.

The Korean economy pulled off an eight-year high 6.2 percent expansion in 2010, posting one of the highest rebounds from the financial recession thanks to public stimulus and resilient exports under record-low borrowing costs.

By Cynthia J. Kim