S. Korean economy to avoid contraction, grow 0.25 pct in 2009: IMF

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SEOUL, Dec. 8 (Yonhap) -- South Korea will avoid an economic contraction this
year on the back of a "comprehensive" government-led fiscal, monetary and
financial policy response, the International Monetary Fund (IMF) predicted
Tuesday.

The IMF raised its forecast for the South Korean economy to 0.25 percent this
year, up from October's projection of a 1 percent contraction. For 2010 it
predicted an expansion of 4.5 percent, up from the previous 3.6 forecast.
"The Korean economy has bounced back impressively from the unprecedented capital
outflows and dramatic collapse in export demand late last year. The authorities'
comprehensive fiscal, monetary and financial policy response helped pave the way
for a recovery that is now being increasingly led by private sector demand," an
IMF delegation said in a statement, wrapping up its one-week staff meeting with
the Seoul government.
"(Korea's) economic activity is expected to expand by 0.25 percent for 2009 as a
whole, and growth is projected at 4.5 percent for 2010. The still significant
output gap and slack in the labor market suggest inflationary pressures will
remain subdued over the near term," it added.
The IMF assessment is broadly in line with growing optimism that the nation's
economy might avoid negative growth for this year. Industrial output expanded for
the fourth straight month in October, while consumption and corporate investment
are also showing signs of a pickup.
The government and major think tanks are turning upbeat about Asia's
fourth-largest economy, saying that it is making a faster-than-expected recovery
from the steep downturn sparked by last year's financial turmoil and resulting
global recession.
Earlier, the state-run think tank, the Korea Development Institute, forecast that
the Korean economy will grow 0.2 percent this year before rebounding 5.5 percent
next year, the most optimistic forecast yet by a major think tank.
The Organization for Economic Cooperation and Development also sharply revised
its outlook for the Korean economy, forecasting it will grow 0.1 percent this
year before rebounding 4.4 percent next year.
Reflecting the latest economic conditions, the Seoul government is also
considering revising its growth forecast. It now expects the economy will shrink
1.5 percent this year, the first negative growth in more than a decade.
The IMF said its outlook is still subject to "considerable uncertainty," but
those risks are "broadly balanced."
"The downside risks stem primarily from sluggish growth in Korea's advanced
economy trading partners. These are balanced by the upside risk to growth from a
stronger-than-projected recovery in emerging economy trading partners, inventory
rebuilding and a boost to consumption from firming labor market conditions," the
IMF said.
In terms of macroeconomic policy, the IMF highlighted challenges that the
government faces due to still lingering uncertainties, recommending the
government front-load its budget if the economy shows signs of weakening.
"In the context of the high degree of uncertainty surrounding the outlook,
macroeconomic policy faces the challenge of striking the right balance between
guarding against any unexpected weakening in momentum and beginning the process
of gradually normalizing policy settings as a self-sustained recovery gains
hold," said the IMF.
"Should signs of renewed weakness in activity emerge next year, planned budgetary
spending could be brought forward and if necessary augmented with well-targeted
fiscal stimulus measures to safeguard the recovery," the IMF said.
Regarding the nation's monetary policy, the IMF said that the central bank's
accommodative policy stance has been "appropriate" in supporting the economy. It
cautiously recommended such monetary stimulus be withdrawn when "the recent
momentum in private demand is firmly established over the coming months."
kokobj@yna.co.kr
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