S. Korean economy to shrink 2.2 pct this year: OECD

By Koh Byung-joon

SEOUL, June 24 (Yonhap) -- South Korea's economy is expected to contract 2.2 percent this year but rebound to a 3.5 percent advance in 2010 on massive stimulus measures, the Organization for Economic Cooperation and Development (OECD) said Wednesday.

The 2009 projection contrasts with a 2.7 percent expansion predicted by the
Paris-based organization in November but is slightly better than a 2.4 percent
decline forecast by the nation's central bank.
"After a deep plunge in the final quarter of 2008, the economy has bottomed out
as fiscal stimulus began to take effect," the OECD said in a report. "Both
government consumption and construction investment, led by public infrastructure
projects, recorded double-digit increases in the first quarter of 2009."
The OECD forecast comes amid budding signs that the economy's worst downturn in
over a decade may be nearing an end following financial and economic turbulence
that started last summer.
To keep Asia's fourth-largest economy from going into a tailspin, the government
has been pushing to stimulate domestic demand by cutting taxes and expanding
fiscal spending.
The economy managed to avert a technical recession in the first quarter by
growing 0.1 percent from three months earlier, after falling 5.1 percent in the
last quarter of 2008.
Adding to optimism, financial markets began to stabilize with local stocks and
currency gaining ground amid increasing inflows of foreign investment and a
growing current account surplus.
"An improvement in financial-market conditions has helped the economy to
stabilize in the midst of the severe global recession ... Positive economic
indicators have led to a strong bounce-back in business and consumer confidence,"
the OECD said.
The OECD, however, noted that a full-swing economic recovery for South Korea will
depend on outside conditions and added heavy household debts could delay a
recovery by dampening consumption.
"With exports accounting for about half of output, Korea's prospects remain
closely linked to world trade. A faster-than-expected global rebound would lead
to a stronger upturn in Korea, while a delayed recovery could push output growth
back into negative territory," the organization said.
"In addition, there is a risk that the heavily-indebted household sector will use
income gains to improve balance sheets rather than to increase consumption, thus
slowing the recovery," it added.
The OECD expected South Korea's exports will decline 10.5 percent for this year,
compared with its November forecast of a 6.4 percent advance, while predicting
private consumption would fall 2.6 percent. Its earlier prediction was a 1.1
percent decline.
As for growing concerns over a fiscal deficit amid a government-led stimulus
drive, the OECD called for policymakers to step up efforts to balance the
country's budget by scaling back spending while at the same time streamlining the
overall tax system for higher growth.
"As the economy strengthens, the growth of government spending should be scaled
back to bring the budget back into balance, while pursuing tax reform to create a
more growth-friendly system," it said.