S.Korea for 2005: Is it another Japan?

By JONG-HEON LEE, UPI Business Correspondent  |  Jan. 4, 2005 at 11:02 AM
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SEOUL, Jan. 4 (UPI) -- Is a new era of low growth or a protracted Japan-style recession awaiting South Korea?

Government officials dismiss the concern, but not a few economists warn South Korea will likely slip into a long-term economic slump unless the country fails to find a new engine for growth and revive sluggish domestic consumption.

Some analysts say South Korea's economy has already entered into an early stage of a double-dip recession -- a second recession following only a brief, mild recovery.

The country's central bank and many private think tanks forecast the country's economic growth would slow to from 4.7 percent in 2004 to 4 percent next year -- well below its annual growth potential of 5 percent -- citing sliding consumer spending and corporate investment at home.

It would mark the third consecutive year that South Korea expands under its growth potential. South Korea's economy grew 3.1 percent last year, tumbling from 7 percent in 2002.

The Seoul government vows to achieve economic growth of 5 percent next year. "The government would not give up the hope of achieving 5-percent GDP (gross domestic product) growth. It is possible to achieve if we try hard," said Lee Seung-woo, chief of the economic policy bureau at the Finance-Economy Ministry.

But most local and foreign economists remain skeptical. A majority of South Korean economists forecast the country's economy will grow around 4 percent in 2005.

The state-run Korea Development institute predicts the country's economic growth will likely dip to as low as 3.2 percent in the first half of next year before stabilizing at an annualized growth rate of 4 percent for all of 2005.

The Bank of Korea forecasts a 4-percent growth next year. The private Samsung Economic Research Institute predicts a 3.7-percent growth, and the Korea Institute for Industrial Economics and Trade forecast a 4.3-percent expansion.

The LG Economic Research Institute says the South Korean economy will likely drop to 3.8 percent, or even to the 2-percent range, should the government fail to revive domestic consumption. The private think tank said South Korea will be Asia's worse performing economies this year and next year, due to consumption and slowing economy.

According to the LG institute, economic growth in Asia will averagely 7.7 percent this year and 6.9 percent in 2005. The Chinese economy, which is to post a 9.3 percent growth this year, is expected to grow 8 percent in 2005.

South Korea's other rivals Singapore and Hong Kong are forecast to expand 4.3 percent and 4.4 percent next year, after this year's 8.4-percent and 7-percent growth, respectively.

"South Korea's weak domestic demand, coupled with the expected slowdown in major export markets is further pushing down South Korea's ranking," said Lee Ji-pyong, an economist at the think tank.

The Asian Development Bank also forecast South Korea's economic growth rate in 2005 will be one of the lowest among 10 East Asian countries. The bank raised its forecast for South Korea's 2005 growth rate to 4.2 percent from 3.6 percent, said but the country will be the lowest among 10 countries in the East Asian region, except Cambodia projected to record a growth of 2.3 percent.

Economists cited sluggish domestic consumption and slowing exports as the factors behind their pessimistic forecasts on the 2005 economic outlook.

South Korean consumers are still reluctant to spend for over two years as they are repaying record-high household debts which reached a high of 500 trillion won ($480 billion), roughly 70 percent of the country's gross domestic production.

The average household has an outstanding debt of around 30 million ($28,800) won this year, comparing with 23 million won ($22,000) in December 2001. At the end of November, 3.65 million individuals were behind in debt repayments by three months or more, according to the Korea Federation of Banks.

"Consumer spending is highly unlikely to pick up significantly next year," said Oh Sang-hoon, an economist at SK Securities.

In another bad omen, exports, which have solely powered the economy's growth for the past years amid a prolonged slump in private consumption, showed signs of losing steam as slowing demand, with the United States raising key interest rates and the Chinese government starting economic policies for retrenchment.

The BOK expects export growth to decline from this year's 31 percent to 7 percent next year as the won's sharp appreciation against the dollar undermines competitiveness, fueling worries that the South Korean economy could rapidly deteriorate. The current account surplus may shrink to 20 billion dollars in 2005 from 28 billion dollars this year.

With no early recovery in sight and pessimistic forecasts, the Seoul government announced this week that it would drastically increase its public spending early next year.

The government will spend 100 trillion won (96 billion dollars) or 60 percent of its total 2005 budget during the first half, up 14.3 percent from the same period this year, the Finance-Economy Ministry said.

In the second half, the government plans to come up with a much-touted South Korean-style "New Deal" spending package on public works. Reminiscent of the U.S. "New Deal" pump-priming initiatives of the 1930s, officials hopes the plan would help end a slump in domestic demand and achieve economic growth of five percent.

The government plans to raise the necessary money for the Dew Deal, worth 10 trillion won ($9.6 billion), by tapping pensions and other state funds

But many analysts say the massive spending packages can hardly revive the economy. "The government's spending plan is expected to raise the economic growth rate only by 0.2 to 0.3 percent point," Jo Dong-chol, an economist at the KDI. "The spending plan can hardly suspend the country's slowing trend," said Lee Sang-jae, an analyst at Hyundai Securities.

South Korean retailers predict the new year to be bleak as consumers continue to tighten their belts, according to a survey by the Korean Chamber of Commerce and Industry.

The retail business survey index registered 64 for the first quarter of next year, the lowest level since the data was collected in early 2002. A mark below 100 indicates that more retailers are pessimistic about their business in the forthcoming quarter,

Top executives of major South Korean companies have also expressed pessimistic views on the nation's economic outlook, forecasting economic slump to be prolonged.

According to a survey conducted by the Korea Employers Federation, more than 30 percent of business leaders said the economic slump would continue for the three years and 80 percent predicted economic upturn to come only after 2006.

Bank of Korea Governor Park Seung warns that South Korea could face a Japan-style long-term economic slump. "We must change our growth engine for a new one otherwise we will fall into the Japan-style long-term recession trap," Park said in a recent address.

"It can't be ruled out that South Korea may suffer from a long-term depression, although the economic conditions in South Korea are less severe than in Japan in the past," said Lee Kyung, a researcher at the private Hyundai Research Institute.

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