another crisis in Korea?

The Bank of Korea said yesterday Korea’s economic growth is projected to slow to 4.6 percent in 2008 from 5 percent last year as surging oil prices further dent the already sluggish domestic demand.

The central bank also said the consumer price index is expected to hit a 10-year high of 4.8 percent this year.

The BOK’s latest growth projection is 0.1 percentage point lower than its previous forecast of 4.7 percent announced in December. The inflation forecast is much higher than the December prediction of 3.3 percent.

The projection of the 4.8 percent annual inflation rate is the highest since the consumer price index hit 7.5 percent in 1998 when the nation suffered an economic upheaval in the wake of the Asian financial crisis.

Kim Jae-chun, BOK’s director general of research, attributed the gloomier economic projections to the rapid surge in international prices of oil and other raw materials and the global economic slowdown.

The central bank revised Korea’s average import oil price forecast to $115 per barrel from a December projection of $81 per barrel and lowered the global economic growth forecast to 3.8 percent from a previous 4.6 percent.

“Due to high oil prices, the Korean households’ income will be eroded and private spending will shrink. The economic growth in the second half will be significantly lower than Korea’s potential growth,” Kim said at a news conference.

The central bankers estimate that the Korean economy will expand only 3.9 percent in the second half, crashing down from a 5.4 percent growth in the first half.

Exports will slow to grow 9.8 percent this year, down from a previous forecast of 10.3 percent expansion while domestic demand will decelerate to 3 percent from a 4.3 percent of earlier projection, according to BOK officials.

“The economy will continue to show a pattern of brisk exports and sluggish domestic demand,” Kim said.

Sluggish domestic demand and eroded corporate profits on costly raw materials will drag down the job market as well, BOK officials said. The economy will see a 190,000 job addition this year, down by one-third from an earlier projection of 300,000 jobs, they said.

The annual current account will see a shortfall of $9 billion in 2008, which is a much grimmer outlook than the initial forecast of $3 billion.

In the second half, BOK said the consumer price index is expected to jump to 5.2 percent on rising energy costs and a weaker won, even though BOK aims to keep the prices between 2.5 and 3.5 percent.

The central bank has kept its key interest rate at six-year high of 5 percent since September on runaway inflation.

The consumer price index hit 5.5 percent in June, the highest since 6.8 percent in November 1998, the National Statistical Office said yesterday.

Hawkish economists say it is time for the central bank to raise the interest rate because its role should be mainly focused on curbing inflation, rather than spurring growth.

“There is a wide discrepancy between what BOK officials are saying and the way they handle the interest rate. While BOK officials say they are more concerned over high inflation than slower growth, the monetary policymakers are still holding the rate steady,” Oh Suk-tae, economist at Citibank Korea, told The Korea Herald.

“BOK should raise the rate considering the inflation fears even though there are two dovish members in the monetary policy committee who favor boosting growth,” he said.

Oh expected that the central bank will slash the rate by 0.5 percent points within three months.

credits to  Kim Yoon-mi in koreaherald