(Yearender) Worst yet to come for export-driven Korean economy: experts

By Koh Byung-joon
SEOUL, Dec. 24 (Yonhap) -- This year has been the toughest for South Korea's
economy in a decade due mainly to worldwide financial turmoil, but the worst has
yet to come as a global recession is expected to hit the export-driven economy
hard, analysts say.
The economy's poor performance belies President Lee Myung-bak's ambitious goal of
achieving a 7 percent growth rate. The government of the
businessman-turned-president, who took the helm at Corporate Korea in February,
was forced to slash growth forecasts several times due to a slew of unexpected
challenges.
Surging crude prices, spiraling inflation and a near-fatal blow dealt by the
collapse of major U.S. investment banks turned Lee's goal into a pipe dream, as
government economic growth predictions for this year tumbled to 3.6 percent.
The United States, Japan and some European countries have already lapsed into
recession and analysts have expressed concerns that an accelerating downturn in
the Chinese economy could scuttle Korean policymakers' renewed objective, under
which they lowered growth projections to 3 percent for next year.
"This year can be summed up as a period when years-old bubbles have finally gone
bust, sending the global economy into a tailspin," said Jeon Min-kyu, an analyst
at Korea Investment & Securities. "Unfortunately, we were not prepared well, and
don't even know what will happen the next day."
"The outlook is no better for next year. South Korea's No. 1 export destination,
China, is facing serious economic recession woes. If the bubble in the local
construction sector pops, it could put additional pressure on domestic demand,"
he added. "The government's 2009 growth target seems to be almost unattainable."
Industry data underlined market-wide concerns. The nation's total exports in
November nosedived 18.3 percent from a year earlier, the steepest fall since
February 2002. During the same period, China-bound shipments plunged 32.9 percent
from a year ago.
The downturn could accelerate as the Chinese economy is showing further signs of
a slowdown following its double-digit expansion in recent years. The Chinese
government forecast that growth might dip to 8 percent next year, but many
observers paint more pessimistic outlooks, with some predicting a 5 percent
expansion.
With exports growth losing steam, anemic domestic demand is emerging as another
downside risk as soaring household debts and freezing job markets cause consumers
and businesses to tighten their purse strings.
According to government data, the nation's inflation-adjusted household spending
contracted 2.4 percent in the third quarter of this year, the lowest since 2003
when related data began to be compiled.
South Korea's industrial output also shrank 2.4 percent in October from a year
earlier, sharply slowing from a 6.2 percent on-year advance in September. This
marked the first decline since output contracted 3.1 percent in September 2007.
As companies rush to scale down investment, job markets remain stagnant. November
jobless rate stood at 3.1 percent with job-creation slumping to a 5-year low.
According to the central bank, South Korea's economy expanded 0.5 percent in the
third quarter of this year from three months earlier, the slowest pace in four
years.
Against this backdrop, the government and the central bank have joined hands to
kick-start the slowing economy with a raft of stimulus measures and aggressive
easing of monetary policy.
South Korea's government recently announced a 14-trillion won economic stimulus
package and sweeping tax cuts. On Dec. 11, the Bank of Korea lowered its key
interest rate by a record one percentage point after trimming the rate by a
combined 2.25 percentage points since early October.
Many think tanks and investment banks expect economic growth will slump further
next year, with some predicting a contraction. If the latter turns out to be
true, it would be the first minus growth for South Korea since the 1997-98
financial meltdown.
The state-run Korea Development Institute trimmed its growth projection for South
Korea to 3.3 percent from 4.2 percent, while leading private think tank Samsung
Economic Research Institute cut its 4.4 percent projection to 3.6 percent.
Foreign institutes have put forth more pessimistic outlooks. Seven major
investment banks including JP Morgan predicted the Korean economy will grow an
average of 1.2 percent next year, far lower than the 3 percent expansion it
predicted a month earlier.
In its economic management plan announced last Tuesday, the Ministry of Strategy
and Finance said that it will strive for 3 percent economic growth in 2009
despite the worldwide slump in consumption, business investment and employment
conditions.
The ministry said full fledged stimulus programs including deregulation, tax cuts
and increased state spending should help to sustain growth for Asia's
fourth-largest economy in the new year, emphasizing that 3-percent growth is not
"a forecast" but "an objective."
"Still, it seems to be quite optimistic," said Lee Sun-yup, an analyst at
Goodmorning Shinhan Securities. "It would be tough to attain the objective as our
economy depends heavily on overseas markets. A recovery in the U.S. economy is
important but no less important is whether China could engineer a soft-landing."
"The lesson that we learned from the 2008 financial turmoil is that we can never
be immune from global instability and a jolt from outside could spark a domino
effect on the local economy at any time," Lee added. "The issue is whether China
and the U.S. can succeed in boosting their domestic demand, which is a boon to
our exporters."
kokobj@yna.co.kr
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