Dec. 5 -- South Korea's economic growth will cool next year as a global slowdown reduces demand for the nation's cars, ship and mobile phones, the central bank said.
The $877 billion economy will expand 4.7 percent in 2008 from an estimated 4.8 percent this year, according to the Bank of Korea's half-yearly outlook published today in Seoul. Exports, which account for two-fifths of gross domestic product, will increase 10.3 percent, slowing from an estimated 11.3 percent gain in 2007, the bank forecast.
Bank of Korea Governor Lee Seong Tae foreshadowed slower growth last month when he said ``changes to the external environment'' had increased the chances of slowing production and highlighted the risk of rising oil prices. Until now exports have been protected from the effects of a U.S. housing recession by demand from China, the world's fastest growing major economy.
``The Bank of Korea is looking for a soft landing for the economy next year,'' said Kwon Young Sun, an economist at Lehman Brothers Holdings Inc. ``Export growth may slow but South Korea has been diversifying its markets and domestic demand will make up for the export slowdown to some extent.''
China surpassed the U.S. as South Korea's largest export market in 2003, and accounted for 22.1 percent of total exports in the first 10 months of this year, compared with 15.1 percent for the European Union and 12.5 percent for the U.S.
The 48 percent increase in the price of oil this year is also a risk for the economy, the central bank said.
Oil Prices
South Korea imports almost all of its oil, so rising fuel prices increase the nation's input costs. At the same time, prices are falling for information and communications products, the value of which represents about 40 percent of South Korea's total shipments, according to Lehman's Kwon.
``So far the shock from rising oil prices has been absorbed by strong economic growth in developed countries and emerging markets but the negative impact is likely to be realized from now on,'' the central bank said today. ``The risks may not crimp our economy too drastically but if oil prices continue to rise and subprime impact expands, the upward momentum of our economy can weaken substantially.''
The nation's estimated $6.5 billion current account surplus is likely to turn to a deficit of $3 billion next year due to the rise in crude oil prices, the central bank forecast.
Consumer price inflation will accelerate to 3.3 percent in 2008, from a 2.5 percent estimated for this year. The bank forecast inflation excluding fresh food and oil will quicken to 2.9 percent next year from 2.4 percent this year.
The Bank of Korea aims to keep annual inflation between 2.5 percent and 3.5 percent.
Kwon of Lehman said today's forecasts suggest there's more likelihood the central bank will keep its key interest rate unchanged when the bank's policy board meets on Dec. 7.
``It'll become a bigger dilemma for the Bank of Korea in coming months as growth slows and inflation accelerates,'' Kwon said. ``The central bank will be paying more caution and attention to the external factors as well as the economic data before deciding on the rates.''
South Korea's economy grew 5.2 percent in the third quarter from last year, the fastest annual pace in almost two years.
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