In 2010, it looks like Korea's economy would be in better shape than a year ago and so does the world economy. LG Economy Research Institution (LGERI) is upbeat on the domestic economy, too. LGERI released the forecast for Korea's 2010 economy. LGERI stated that Korea will make a full recovery from the recent economic crisis. Moreover, the report also showed an improvement in exports, which is driven by China's strong growth. There is no doubt that Korea will raise its economic growth this year, but there are some risks. Yet, LGERI still sees household debt, difficulties in the construction business and the possibility of real estate prices to fall, but it will not be enough to plunge the situation.
Looking closer to the forecast for Korea by LGERI
1. Gentle Growth
Improvement in exports leads to an increase in purchasing power, which in turn improves domestic consumption conditions. This time, the rise expects to be in the harmony with the external sector and the domestic market, unlike a year ago. On the other hand, the currency appreciation trend may continue, which will make it hard to enlarge the world market share. Also, wages and employment needs to better than last year.
2. Increasing the consumption with Wealth Effect
Since stock prices are strong and LGERI guesses it will come with "wealth effect". This means private consumption will increase because, wealth effect represents the relationship between personal wealth and consumer spending, and consumers have a tendency to spend more money when they feel rich.
3. Facility Investment Growth
In Feb. the average utilization rate manufacturing was 80 percent, the index is the same number as the level before the economic crisis. Facility investment growth among the export-boom industries are expected to rise.
Due to the tendency of protectionism in the world market, Korean companies recognized the needs of localization to attract more foreign investment. Also, the trends of software and business services will bring accented investment on intangible assets more than a facility expansion to the domestic market. Since private constructions in Korea have slumped, the size of the recovery and reinvestment act for construction investment would also be sluggish.
4. IT Industry keeps doing its best
Today, the global economic recovery is well underway, and global commerce looks bright, too. Economist Intelligence Unit (EIU) forecasts the world growth for 2010 at a increase of 13.2 percent for exporting power from 23.4 percent from the previous year. And Korea is expected to grow on exports around 20 percent. This is because of the high export coverage to China, ASEAN, and developing couturiers reported a higher growth when compared to Korea.
5. Lack of Employment compared to growth
Employment rose by 132,000 over the same period in 2009. The manufacturing industry has provided 62,000 jobs this year. Employment for the private-sector is still in the recover stage, but 90,000 jobs have been gained though. This year's employment is satisfactory and unemployment with stabilize to three percent.
6. Easy Inflation and Continued deflation
LGERI predicted that inflation would be cooled down to three percent. The continuation of deflation gives a very low inflationary pressure. And the world economy also has a deflation, so inflation may slowly rise.
7. Financial Market and currency are both stable
Financial market is on the stable track since 2009. This year, as the credit spread has slipped to 100bp, it made a recovery to the previous level. And foreign investors net purchasing of bonds and stock is continuing steadily increasing. In a mean time, currency rate is expected to be the average level of KRW 1,100. Thus, foreign investment funds will be positive due to net flows. This year, the foreign investment inflows are expected to expand reasonably in size.