SEOUL, May 19 (UPI) -- A won gaining in strength against the dollar is clouding South Korea's economic outlook for this year because local exporters are earning less and domestic consumption remains low.
The Finance Ministry, acknowledging analysts' assessment, cut its economic forecasts, which had predicted 5 percent growth this year.
Lee Seung-woo, a chief policy maker at the Ministry of Finance and Economy, said the government was seriously considering reducing the forecast, adding the goal could not be reached without a massive stimulus package.
"It is too early to consider reconsidering growth target," he said Lee Seung-woo, a chief policy maker at the Ministry of Finance and Economy. "Yet, the government will take first-half performance into consideration when mapping out economic policies for the second half of the year."
The 5 percent forecast followed 4.6 percent in 2004, when the economy, though dented by feeble consumer spending, was boosted by brisk exports.
Thursday's remarks come after grim forecasts by economists about first quarter performance. The central Bank of Korea is due to release preliminary first-quarter gross domestic product data Friday, widely expected to be weaker than previous estimates.
Park Seung, the central bank chief, last week put first-quarter economic growth at below 3 percent from a year earlier, falling short of a previous forecast of 3.4 percent.
"First-quarter GDP growth may fall short of 3 percent because of the delayed recovery in domestic consumption," he said.
Park said only in the second half would the economy shows signs of recovery. He cited high oil prices, a strong won, a global economic slowdown and tensions over North Korea's nuclear weapons drive as reasons.
"Private consumption and investment are steadily improving but they are still too weak to offset cooling exports," he said.
The central bank had forecast first-half growth to reach 3.4 percent and 4.4 percent in the second half; with 4.1 percent growth for the full year. Last week, the bank left its key interest rate at an all-time low of 3.25 percent for May, the sixth consecutive month of no change, to help boost domestic spending and corporate investment.
The country's major economic research institutes also have grim estimates. South Korea's leading Samsung Economic Research Institute think tank said the country's economy grew 2 percent.
The economy, Asia's third-largest, is expected to expand 3.7 percent this year with its growth pace likely to accelerate in the second half, it said, forecasting a 3.2 percent growth in the first half and 4.2 percent in the second half.
Goodmorning Shinhan Securities estimates the country's first-quarter growth at 2.7 percent and full year at 4.3 percent. The median forecast is 2.8 percent in the first quarter and 4.2 percent for the full year. The South Korean economy grew at a lower than expected 4.6 percent in 2004 as a decline in private consumption offset brisk exports led by red-hot demand from China.
In particular, in the January-March period, the economy expanded 0.5 percent from the fourth quarter last year, when it grew 0.9 percent, marking the smallest increase since the second quarter of 2003.
Policymakers seemed stunned by the weak performance despite a 39-percent increase in government spending in the first four months to spur growth. The government spent $66.4 billion during the first four months of the year, according to the Ministry of Planning and Budget. The government also slashed corporate taxes, extended its consumption tax cut and froze its key interest rate at a record-low 3.25 percent for the sixth consecutive month.
Officials and economists attributed sluggish growth to the rise of the local currency against the U.S. dollar, which has hit exporters. Domestic consumption has yet to emerge from a two-year slump caused by the bursting of a consumer credit bubble in 2002 that left millions with credit card debts.
"The slow recovery in domestic demand was not strong enough to counter the slowdown in exports," said Oh Moon-seok, an economist at LG Economic Research Institute.
Exports, which account for about two-fifths of the economy, rose only 13 percent in the first quarter, slowing from a 38 percent increase a year earlier, mainly because of the won's appreciation against the greenback, according to the Ministry of Commerce, Industry and Energy. In April, the export growth rate slowed to 7.7 percent, marking the nation's first single-digit increase in nearly two years.
Samsung Economic Research Institute says exports will grow only 8.2 percent this year.
"The export growth rate will drop to a single-digit figure in the second half as the actual won-dollar exchange rate hovers below the optimal exchange rate," the think tank said in a recent report.
An increase in the South Korean currency against the U.S. dollar is hitting exporters, whose products are now relatively more expensive on the international market. The won has risen 4 percent against the dollar so far this year on top of a 15 percent gain last year.
According to the Korea Exchange, the country's corporate earnings dropped sharply in the first quarter of the year due to rising oil prices and a strong won. The combined profits of 537 companies that close their books in December dipped 16.2 percent to $12.1 billion in the first three months of the year from a year earlier, it said.
Samsung Group, the country's leading business group, saw its first-quarter earnings plunge 52.6 percent, and LG Group's earnings nose-dived 83.2 percent, according to the exchange.
Economists call for the government to take aggressive measures to spur the slowing economy.
"The government should not abandon its economic stimulus package since the recovery isn't likely to be dramatic for some time," said Hong Sun-young, chief economist at Samsung Economic Research Institute.
