RTTNews - Boosted by stimulus spending, the prevailing low interest rate environment and signs of stabilization emerging in global economic conditions, the South Korean economy is expected to fare better than initially thought, according to Bank of Korea's latest estimates. In a communiqué, the central bank said Friday South Korea's GDP is expected to decline by 1.6% in 2009, with the economy expected to rebound in 2010 to show 3.6% growth.

The latest projections compare to the bank's earlier estimate for a 2.4% GDP decline in 2009 and 3.5% growth for 2010. The emerging Asian economy had grown at a 2.2% rate in 2008. In line with recent expectations of a small anemic growth in the second half of the year for most of the global economies ravaged by the U.S. subprime crisis and the credit crisis, Korea is also expected to see a 0.2% annual growth in the second half of the year after a steep 3.4% contraction in the first half.

Despite the relatively upbeat projections, the contraction expected for 2009 would make the economic performance the worst since 1998, a period hit hard by the Asian financial crisis, when the economy contracted 6.9%.

Incidentally, the Bank of Korea announced yesterday a status quo position on interest rates, as it held rates at 2% for the fifth straight month after reducing it by a cumulative 300 basis points since October 2008.

Dissecting the numbers that make up the GDP, the central bank noted that facilities investment is likely to take a severe beating, with the metric estimated to show 15.1% year-over-year decline. The predicament comes as no surprise, as the demand decline induced by the economic slowdown has severely impacted capacity utilization. That said, the bank expressed confidence that the decline will decelerate, given the government's unstinted support to improve the investment environment.

Private consumption is expected a show a 1.4% drop, as savings related to providence and the lagged improvement in income conditions may more than offset an improvement in consumer confidence, increases in asset prices and the stimulus-induced spending.

Exports are likely to decline by a more modest 2.8% compared to a 6.8% drop in imports. The improvement foreseen in global economic conditions should bode well for exports. Meanwhile, constructions investment, which held up even in the first half is expected to rise 2.2% for the whole of the year, as the government's expansion of SOC-Social Overhead Capital - investment more than offset lackluster residential and non-residential construction.

A rebound in facilities investment would set the stage for a return to positive growth in 2010. The bank expects facilities investment to rise by 13.6%, construction investment by 2.1%, private consumption by 2.6%, exports by 8.5% and imports by 9.8%.

After the economy lost about 160,000 jobs in the first half, the central bank expects job losses to mitigate to 70,000 in the second half of the year due to concerted efforts from the government to create jobs. The job losses for the whole of the year are estimated at 110,000. The unemployment rate is expected to touch 3.5% in the latter half of the year, a slowdown from a 3.8% rate in the first half.

Inflationary environment is expected to remain benign, as the overall consumer price inflation rate is estimated at 2.9% for 2008 and 3% for 2010, with the increase in 2010 attributed to a modest recovery in the domestic economy and upward pricing pressure exerted by higher oil prices. If the forecasts prove right, the inflation rate for the three year period between 2007 and 2009 will be at 3.4%, which is within the central bank's target of 3%, plus or minus 0.5%. The core consumer price inflation for 2009 is likely to be 3.5%. In comparison, consumer prices and core consumer prices rose by 4.7% and 4.2%, respectively in 2008.

On the fiscal side, the current account surplus is estimated at $29 billion in 2009, with the surplus for the second half likely to be come in at $8 billion compared with the first half's 21 billion euros. The Bank of Korea expects the current account surplus for 2010 to narrow to $7 billion due to a recovery in domestic demand.

Just like its global counterparts, the Korean government doled out stimulus packages to help the economy emerge out from the pandemic economic crisis. Since last year, the South Korean government has offered about $50 billion in fiscal stimulus and tax cut plans and sealed a $30 billion currency swap arrangement with the U.S. Federal Reserve to shield the country's economy from the global crisis.

It may be recalled that the South Korean government earlier in June raised its GDP forecast for 2009 to a 1.5% contraction from a 2% contraction it estimated earlier, although it held firm to its 2010 forecast for 4% growth.

Even as many of the developed nations saw a recession in the aftermath of the financial crisis, South Korea narrowly averted a recession by showing 0.1% growth in the first quarter. Technically, a recession is two straight quarters of GDP declines.

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