Asia Finance Blog: South Korean central bank revises economic forecasts; economists don’t share the optimism

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South Korean central bank revises economic forecasts; economists don’t share the optimism

The South Korean Central Bank in its half-yearly economic outlook has cut the inflation and growth forecast. While a stronger won and declining food costs would help curtail price increases, higher oil prices could slow economic growth in the second half, according to the central bank.

Consumer prices forecast for 2006 has been revised 2.6 per cent from December's 3 per cent forecast. The core inflation rate, which excludes oil and food, is expected to be 2.3 per cent this year, less than the previous forecast of 2.7 per cent. A cut in the inflation forecasts has added to expectations that the bank may keep interest rates unchanged this week. Economists expect a slowdown in the economy in the second half against the backdrop of falling confidence and rising oil costs. While the bank has kept the 5 per cent economic growth forecast for 2006 unchanged, it has cut its second-half economic growth forecast to 4.4 per cent from the 4.6 per cent estimate made in late December. The central bank however, says that the economy will take a breather in the second half and will not enter a slowdown mode. The central bank believes that exports and domestic consumption will continue to drive growth.

Economists however, do not share central bank’s optimism. The bank's 5 per cent growth forecast for this year is higher than those of private economic institutes. LG Economic Research Institute expects a 4.7 per cent growth while the Samsung Economic Research Institute expects growth at 4.8 per cent. State-run economic institutes share central bank’s optimism, pegging growth over 5 per cent.

The central bank thinks that growth will continue albeit at a little slow pace and has hit back at private economists saying that they are too pessimistic.