South Korea Tuesday cut its economic growth target for next year due to sluggish private consumption and investment, as a steep rise in its currency, the won, threatens to hurt exports.
The Bank of Korea lowered the growth forecast for 2007 from 5.0 to 4.4 percent, expecting the gross domestic product (GDP) to expand 4.0 percent in the first half of 2007 and 4.7 percent in the second half. "The GDP growth rate is forecast at 4.4 percent in 2007, lower than this year's projected 5.0 percent," the bank said in an economic outlook.
"The economy is forecast to gather pace ... moving towards the second half of next year." The bank said Asia's fourth largest economy, whose annual exports hit the 300-billion-dollar mark on Tuesday, would enjoy solid growth in exports thanks to a steadily growing world economy.
Merchandise exports should grow a solid 10.8 percent in 2007, somwehat lower than the 12.9 percent projected for this year, but this gain would not necessarily provide a big boost to the economy as might be expected.
"The IT industry which leads exports also relies heavily on imports and so its export growth insufficiently boosts demand at home, such as in private spending and investment," the Bank of Korea said.
"Conservative business administration and regulatory practices also serve as a restraint on corporate investment." The central bank cited oil prices, a possible hard-landing for the US economy and a crisis over North Korea's nuclear program as potential risks that could undermine growth next year.
Commerce, Industry and Energy Minister Chung Sye-Kyun also warned of the won's steep gain against the US dollar, which would hurt South Korean exporters by making their products more expensive on global markets.
"The US dollar is globally weak, but the problem is the won is gaining against the US dollar too excessively than any other currencies," Chung told a state-run KBS radio program. The won closed at 924.3 against the US dollar Tuesday, the highest level in more than nine years.
So Jae-Yong, a macroeconomics analyst of Daishin Securities, warned the won's appreciation would continue next year, undermining South Korean exports, which account for some 40 percent of the country's economy.
"The won-dollar exchange rate emerges as a key factor of burdening exporters. We expect the won to keep strengthening to the 910-level against the US dollar next year," So said.
South Korea, which grew 4.0 percent in 2005, was slated to grow some five percent this year, a target that officials say is attainable. The bank's adjusted growth forecast followed an Organisation for Economic Cooperation and Development (OECD) report last week saying Korea's growth rate would ease to around 4.5 percent next year.
"The economy has slowed towards the second half of this year but its recovery will gain pace fast towards the second half of next year," said Kim Jae-Chon, head of the central bank's survey bureau.
It expects private consumption to slow from 4.2 percent growth this year to 4.0 percent in 2007, citing a rise in household debt, tax payments and a lackluster job market. Corporate capital spending should grow 6.0 percent, down from this year's projected 7.4 percent, with construction up 1.6 percent after a 0.7 percent contraction in 2006.
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