Bank Of Korea Raises 2007 Growth Forecast To 4.5%, Tuesday, July 10, 2007 4:47:04 AM

The South Korean economy is forecasted to expand 4.5% in 2007 on the back of solid exports and higher domestic spending, the Bank of Korea said Tuesday. This was a percentage point higher than the 4.4% growth predicted in December. The central bank reiterated its projection made in the March monetary policy statement released on May 14, that GDP will likely advance 4.7% in the second half. The first half growth was revised upward to 4.4% from the 4.0% increase estimated in the policy statement.

Domestic Spending, Exports To Grow

Domestic spending is expected to rise 4.1% in 2007, slightly below the 4.2% growth a year ago. Exports will likely register 11.0% growth on the back of stronger overseas demand. Last year, exports grew 12.6%. Growth in imports is projected to moderate to 10.2% from 10.8% last year.

The central bank believes that construction activity will pickup significantly, with investment in this sector expected to gain 2.0% annually, reversing the 0.4% decline a year ago. Corporate capital spending is another area that the bank expects to recover in 2007, with an expected 7.5% growth, from the 7.6% decline last year.

The jobless rate is projected to narrow to 3.3% in 2007, from 3.5% last year.

South Korea`s first quarter gross domestic product expanded 0.9% sequentially and 4.0% over last year. The economy grew by identical margins in the previous quarter, while logging 5.0% growth for the year 2006.

Private consumption rose 4.1% annually in the first quarter due mainly to a surge in household spending on durables and services, the central bank said last month.

Gross fixed capital formation gained 2.0%, up from 1.2% rise in the December quarter, with facilities investment rising 4.4% on a quarterly basis compared to a 0.1% gain in the previous quarter. On a year-over-year basis, facilities investment rose 10.8%, while construction showed a growth of 3.9%.

Due to a diversified export base both in terms of market and product, South Korea`s export sector has survived a US slowdown in the first half year, analysts say. Merchandize exports expanded 14.4% annually in April-May almost unchanged at 14.6% growth in the first quarter.

Inflation Pressure Shows Up

Meanwhile, the bank expected an upsurge in consumer inflation due to increasing international commodity prices and higher pressure on the demand side.

Consumer prices will likely rise 2.4% annually, up from 2.2% last year, the bank said. Core consumer prices, excluding agricultural products and oil prices, are projected to advance 2.3% in 2007, compared to a 1.8% increase in the previous year.

The South Korean Consumer Price Index - CPI narrowed to an annualized 2.3%, below the expected rate of 2.4% in May, a government report indicted last month. In April, the CPI climbed 2.5% from a year ago. On a monthly basis, the index edged up 0.1% in May, down from 0.4% growth in April.

Service Account Deficit To Impact Current Account Surplus

The central bank predicted that the current account surplus will reach US$2 billion in 2007, in line with an initial forecast, but below last year`s surplus of US$6.1 billion. The expected fall in surplus is due to the widening of the service account deficit, particularly in travel account.

The trade surplus is likely to be US$31.5 billion on strong exports, despite rising imports and raw material costs, the bank said. However, the service account deficit will expand to US$29.5 billion, up from U$23.1 billion last year.

BoK To Meet Thursday For Policy Decision

Meanwhile, the BoK`s Monetary Policy Committee is scheduled to meet Thursday for its next policy decision. In June, the central bank retained the key rate at 4.5% for the tenth consecutive month. A certain section of the market expects the central bank to raise interest rates this time in view of its revised outlook on growth and inflation.

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