Bank of Korea says economic growth to slow in 2011

[December 10, 2010]  SEOUL, South Korea (AP) -- South Korea's economic growth is set to slow to a more normal level of 4.5 percent next year, the central bank said Friday in a report that warns of significant uncertainties for the outlook including tensions with North Korea.

The slowdown next year will be from forecast growth of 6.1 percent for 2010, a year in which South Korea's recovery from the global financial crisis and subsequent worldwide slowdown accelerated.

South Korea is the world's 15th-largest economy and an export powerhouse home to major global manufacturers including Samsung Electronics Co. and Hyundai Motor Co.

The Bank of Korea injected a note of caution into its outlook for next year, saying it is "attended by a considerable degree of uncertainty."

The bank cited "geopolitical risks" in the aftermath of a deadly North Korean attack on a South Korean island last month that sent tensions on their divided peninsula soaring. It also highlighted the "unknowns" of European debt problems, rising Chinese inflation and how monetary policy at the U.S. Federal Reserve will develop following its move to purchase $600 billion of government bonds.

South Korea's economy rebounded strongly this year after sputtering to a meager 0.2 percent expansion in 2009 following the crisis and slump.

Growth of 4.5 percent next year "can be assessed as a level close to the trend level," the bank said in the report, highlighting that this year's strength followed last year's low base.

The 4.5 percent figure for next year was unchanged from the bank's July outlook, though the 6.1 percent estimate for this year was raised from the previous 5.9 percent.

South Korea's economy, Asia's fourth largest, will likely feel the brunt of next year's slowdown in the first half of the year as frontloading of budget spending -- which can have a stimulatory effect -- will be reduced during that period, the bank said.

"Momentum for economic recovery in advanced countries including the U.S. will gain strength in the second half," the bank said in offering a reason why the expansion is expected to pick up in the final six months of 2011.

The bank said that growth was likely to strengthen to 4.7 percent in 2012.

Consumer price inflation, which has been a source of concern this year, is set to increase in 2011 to 3.5 percent from this year's expected 2.9 percent, the bank said.

South Korea's inflation rate hit 4.1 percent in October. The year-on-year increase was slightly outside the central bank's comfort zone. Its inflation target is 3 percent, though that includes what it calls a "tolerance range" of plus or minus 1 percentage point.

Inflation dropped to 3.3 percent in November, but the bank's monetary policy committee warned Thursday after leaving its key interest rate unchanged at 2.5 percent that the trend is for rising prices to continue.

The Bank of Korea aggressively cut the benchmark rate a total of 3.25 percentage points to a record low 2 percent between October 2008 and February 2009 as it worked with other central banks to fight the crisis and downturn.

The bank raised it to 2.25 percent in July amid inflation concerns and again to 2.5 percent in November.

[Associated Press; By KELLY OLSEN]

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