Uncertainties Shroud Q3 Economic Outlook
Growing uncertainties over the movement of the exchange rate and oil prices are making it hard for economists and corporate executives to predict where the Korean economy will go in the third quarter, experts said yesterday.
Social tensions that may grow over labor issues and the heightened geopolitical risk from North Korea add to the factors in making it difficult to project a future direction of the economy.
Their comments came as some economic indicators pointing north in the recent months bolstered optimists' position that the Korean economy is recovering quickly.
Korea averted a technical recession by growing 0.1 percent in the first quarter from the previous three months. Some economists project that the economy would expand as much as 2 percent in the second quarter, as manufacturing production, retail sales and housing transactions all rose in April from a month earlier.
However, exports pointed out that it is too early to predict a full recovery, because the government's support is only temporary and external factors could develop unfavorably for Korea.
"Only two factors - the government's aggressive counter-cyclical policies and the relatively weak local currency - have sustained the slumping economy in the first half," said Bae Sang-kun, director of the economic research division at the Federation of Korean Industries.
"But the effects of the expansionary fiscal spending are likely to subside and a stronger won will hurt the profitability of exporters in the third quarter. A recovery driven by the private sector will be barely visible," he said.
The won, which had plunged as low as to 1,570 won against the dollar in early March, gained to 1,253.90 on Friday. A strong won makes Korean products expensive in overseas markets, hurting profitability of exporters whose shipments contribute to over 50 percent of the nation's gross domestic product.
The rebound of oil and commodity prices is another risk for Korean companies who might have to deal with cost-push inflation.
The nation's benchmark Dubai crude oil rose almost two-fold to $71.19 per barrel on Friday from the end of December, according to government data. The price of soybeans rose 30 percent, bronze 73 percent and aluminum 10 percent, during the same period.
"These hikes in international raw materials will slow a world economic recovery, which will also affect Korean exports," Bae noted.
Korea's consumer inflation rose 2.7 percent in May from a year ago, which is within the central bank's inflation target range of 2.5 to 3.5 percent.
A possible change in the Bank of Korea's stance on its monetary policy to absorb liquidity to preemptively fight inflationary pressure could dampen the pace of an economic recovery, he added.
BOK Governor Lee Seong-tae hinted on Thursday that the central bank's rate cut might have come to an end, by saying the "recent rise in international raw material prices has affected inflationary pressure." The central bank held the interest rate steady at 2 percent.
But Finance Minister Yoon Jeung-hyun played down speculation that the government might start absorbing liquidity.
"The government will stick to its current stance on aggressive fiscal spending. We will wait for second-quarter corporate earnings results to come out until late July, to gauge the economic condition," Yoon told reporters at a policy seminar in Gwacheon on Friday.
Ha Joon-kyung, economics professor of Hanyang University, said the most urgent issue the government has to deal with now, is to tighten financial regulations to prevent asset bubbles from being formed.
"The growing short-term floating liquidity should not fan inflation expectations. To do so, tougher financial regulation is needed," Ha said.
"At the same time, the government shouldn't miss the right timing of corporate restructuring, which is now, when the financial markets are relatively sound."
(yoonmi@heraldm.com)
By Kim Yoon-mi
quoted from: The Korea Herald
Social tensions that may grow over labor issues and the heightened geopolitical risk from North Korea add to the factors in making it difficult to project a future direction of the economy.
Their comments came as some economic indicators pointing north in the recent months bolstered optimists' position that the Korean economy is recovering quickly.
Korea averted a technical recession by growing 0.1 percent in the first quarter from the previous three months. Some economists project that the economy would expand as much as 2 percent in the second quarter, as manufacturing production, retail sales and housing transactions all rose in April from a month earlier.
However, exports pointed out that it is too early to predict a full recovery, because the government's support is only temporary and external factors could develop unfavorably for Korea.
"Only two factors - the government's aggressive counter-cyclical policies and the relatively weak local currency - have sustained the slumping economy in the first half," said Bae Sang-kun, director of the economic research division at the Federation of Korean Industries.
"But the effects of the expansionary fiscal spending are likely to subside and a stronger won will hurt the profitability of exporters in the third quarter. A recovery driven by the private sector will be barely visible," he said.
The won, which had plunged as low as to 1,570 won against the dollar in early March, gained to 1,253.90 on Friday. A strong won makes Korean products expensive in overseas markets, hurting profitability of exporters whose shipments contribute to over 50 percent of the nation's gross domestic product.
The rebound of oil and commodity prices is another risk for Korean companies who might have to deal with cost-push inflation.
The nation's benchmark Dubai crude oil rose almost two-fold to $71.19 per barrel on Friday from the end of December, according to government data. The price of soybeans rose 30 percent, bronze 73 percent and aluminum 10 percent, during the same period.
"These hikes in international raw materials will slow a world economic recovery, which will also affect Korean exports," Bae noted.
Korea's consumer inflation rose 2.7 percent in May from a year ago, which is within the central bank's inflation target range of 2.5 to 3.5 percent.
A possible change in the Bank of Korea's stance on its monetary policy to absorb liquidity to preemptively fight inflationary pressure could dampen the pace of an economic recovery, he added.
BOK Governor Lee Seong-tae hinted on Thursday that the central bank's rate cut might have come to an end, by saying the "recent rise in international raw material prices has affected inflationary pressure." The central bank held the interest rate steady at 2 percent.
But Finance Minister Yoon Jeung-hyun played down speculation that the government might start absorbing liquidity.
"The government will stick to its current stance on aggressive fiscal spending. We will wait for second-quarter corporate earnings results to come out until late July, to gauge the economic condition," Yoon told reporters at a policy seminar in Gwacheon on Friday.
Ha Joon-kyung, economics professor of Hanyang University, said the most urgent issue the government has to deal with now, is to tighten financial regulations to prevent asset bubbles from being formed.
"The growing short-term floating liquidity should not fan inflation expectations. To do so, tougher financial regulation is needed," Ha said.
"At the same time, the government shouldn't miss the right timing of corporate restructuring, which is now, when the financial markets are relatively sound."
(yoonmi@heraldm.com)
By Kim Yoon-mi
quoted from: The Korea Herald
