Sunday, November 21, 2010

KDI cuts growth forecast slightly for next year

The Korea Development Institute lowered its outlook on next year’s economic growth from 4.4 percent to 4.2 percent as global economic conditions change, including China’s recent credit tightening in which it raised its reserve requirement over the weekend.

The institute also said that growth for this year will be 6.2 percent, raising the final outlook from 5.9 percent this May.

The estimate for 2011 is lower than the 5 percent growth forecasted by the finance ministry and 4.5 percent forecasted by the Bank of Korea.

KDI said that its forecast for next year reflects a slight slowing of the global economy next year compared to this year.

“The lowered figures do not mean that economic growth will slow down,” said Hyun Oh-seok, president of KDI. “But it signifies that Korea’s economy is returning to the highest possible growth rate without causing inflation. Policies in the future must focus on boosting growth potential through various restructuring.”

When Korea’s economy grows at the low- to mid-4 percent level, it is considered neither over-heated nor cooling down.

The Organization for Economic Cooperation and Development, major investment banks and the International Monetary Fund are all forecasting Korea’s growth for next year to be in the low- to mid-4 percent range. The OECD expects 4.2 percent growth, while the IMF predicts 4.5 percent growth.

The KDI said actual growth figures could be lower than expected if fluctuations in exchange rates or raw material costs leads to tensions between countries. It also predicted the Korean won will continue to appreciate.

The report said that Korea’s interest rate is at a very low level, and normalizing the rate is important because low rates can lead to price bubbles and inflation. Inflation is expected to be 3.2 percent for 2011.

“The gross domestic product gap, which is the difference between the actual GDP and potential GDP, turned to a positive mark in the first quarter of the year,” said Kim Hyun-wook, a senior researcher at KDI. “Therefore the interest rate must be normalized, with a reasonable rate being around 3 percent.”

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