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Economy facing uneven recovery.

Byline: Kim Rahn

The economy still has a long way to go to fully recover from its slump, with fourth-quarter growth last year slowing from previous levels. While the Bank of Korea (BOK) predicts that Korea's growth in 2014 will be 3.8 percent, this target may be unattainable if domestic demand remains at the low level of recent years. Reports say low domestic demand can be an obstacle to the country's economic recovery.

The BOK said Thursday that Korea's gross domestic product (GDP) grew 0.9 percent in the fourth quarter of 2013 from the previous quarter. This was down from 1.1 percent in the second and third quarters.

For the whole year, GDP grew 2.8 percent, matching the BOK's earlier estimate. This was up from 2012's 2 percent.

"We presume that the main cause of the less-than-1-percent growth in the fourth quarter was reduced government spending compared to previous quarters, which resulted from a shortfall in tax revenues," Jung Yung-taek, BOK director general, said.

He said that government spending and its extraordinary budget was one factor boosting domestic demand. In the fourth quarter when spending was cut, the quarterly growth of private consumption, which is key to domestic demand, was 0.9 percent, down from the third quarter's 1 percent.

Jung said that exports have driven the growth and will be a key driver this year too, meaning that private consumption is still too weak to lead growth.

Facilities investment decreased for two consecutive years, falling 1.9 percent in 2012 and 1.5 percent in 2013. "It increased largely in the fourth quarter by 6.4 percent. But we need to keep watching whether this trend will continue," he said.

If government spending and other stimulus programs this year are not significantly effective, Korea may not reach its goal of 3.8-percent GDP growth unless domestic demand jumps.

The International Monetary Fund (IMF) cited slow domestic demand as a downside risk for Korea, Wednesday. In its press release, the IMF said its executive board members stressed after their recent visit to the country that Korea needs structural reform to promote domestic demand and inclusive growth.

"Directors noted that, while a modest recovery is underway, domestic demand remains relatively weak and the output gap is expected to remain negative through 2014. They considered it important to ensure that monetary and fiscal attitudes remain supportive of the recovery until it is firmly entrenched," it said.

Causes for weak domestic demand include high household debt, weak household income growth and population aging. "With a significant private debt overhang, key domestic risks are weak demand and, over time, lower potential growth if structural reforms fail to offset the drag from rapid aging," it said.

Hyundai Research Institute analyst Lee Joon-hyup said the growth rate of private consumption has been lower than GDP.

"Although people have more income, they are not increasing consumption due to concerns about retirement, unemployment and high household debt," he said.

For external downside risks, the IMF cited slower growth in Korea's main trading partners and more sever market stress.

Ronald Man, an economist at HSBC, said Korea is showing modest growth but there are risks that need attention. "First are the downside risks to Korea's export growth from the sustained weakness of the yen. And second, recovery still needs to be broader: only eight key industries out of 15 posted stronger sequential growth in the fourth quarter."
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Publication:The Korea Times News (Seoul, Korea)
Geographic Code:9SOUT
Date:Jan 23, 2014
Words:572
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