Experts call economic outlook grim; government disagrees

Finance ministry says figures do not reflect national situation

Many economic think tanks forecast that the South Korean economy will slow down in the second half of this year, compared with its progress in the first half, based on gloomier economic indicators and a rise in inventories. However, the government remains optimistic about South Korea’s performance, at least between now and September.

The South Korean economy grew 5.7 percent in the first half of 2006.

Think tanks such as the Samsung Economic Research Institute (SERI) and the Korea Institute for Industrial Economics and Trade recently released reports predicting that the economy will decelerate to around a 4 or 4.7 percent growth rate, respectively, in the next six months.

The prediction of economic slowdown is mainly based on two factors--bleak economic indicators and ballooning inventories, experts say.

The country’s leading economic indicators, measures of how the economy will fare six months to come, have fallen for the past four months in a row, according to official data.

The inventory ratio at the manufacturing sector, which stood at 89.1 percent in January, rose to 97.2 percent in May, maintaining its upward move for the past five months. A rise in inventories means a deterioration in consumer sentiment, experts say, as less products are being bought off the shelves.

The operation ratio, another measure of economic outlook, also saw a decrease during the first half of the year. In January, the figure stood at 83.5 percent, but continued to edge downward to 80.5 percent in May.

"The Korean economy has improved ever since the first quarter of last year, but is feared that it will lose its momentum if it did indeed reach its peak in the first half of this year," said Jung Moon-kun, a leading analyst at SERI, during a seminar organized by the Korea Chamber of Commerce and Industry last month.

The Ministry of Finance and Economy, however, noted that think tanks need to take a closer look at leading economic indicators to determine how the economy might do in the months to come. According to its explanation, the drop in the leading indicators, consisting of 10 separate figures, was mainly attributable to a cut in consumer sentiment and interest rates. The index for consumer sentiment, it argued, is based entirely on opinion, and the figure for interest rates was largely affected by the U.S Federal Banks’ move in raising its rate, not by local conditions.

Yoon Woo-jin of the Korea Institute for Industrial Economics and Trade also noted that the rise in inventories resulted not from "weakened consumer sentiment" but from an increase in production.

"This is because companies are trying to brace themselves for a rise in future demand, a phenomenon that usually appears during an expansion cycle," Yoon added.