South Korea: import-led recovery?

The central bank of South Korea has today raised its 2010 growth forecast to 4.6 per cent from its 3.6 per cent July estimate, making an interest rate rise more likely. Rates are currently at a record low of 2 per cent.

The report predicts growth will be driven by imports, drastically reducing the current account surplus, from $43bn this year to $17bn next year and just $9bn in 2011. “With policy effects declining, the private sector is anticipated to lead the growth,” says the report.

The Bank’s Economic Outlook for 2010 forecasts CPI to grow slowly, from 2.8 per cent this year to 3.2 per cent in 2011. The forecasts are built upon quite optimistic assumptions about global recovery, with global economic growth estimated at 3.3 per cent next year. But “there is a considerable degree of uncertainty over the forecasting path.”

The report identifies three key risks: (1) Abroad – sovereign downgrades and losses on commercial real estate; (2) Domestically – an increase in the price of raw materials; and (3) Volatility in the exchange rate, fuelled by the dollar carry trade.

N.B. The bank’s estimates of Chinese growth are 8.5 per cent in 2009 -> 9.3 per cent in 2010 -> 8.7 per cent in 2011.

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