By Lee Hyo-sik
Staff Reporter
The International Monetary Fund (IMF) said Thursday that the Korean economy will contract 1 percent this year from 2008, revising upward its earlier forecast of a 3 percent decline made in July.
The improved outlook comes at a time when the nation has become one of the fastest recovering economies from the global financial market debacle on massive government stimulus package.
In its World Economic Report, the Washington-based organization also raised Korea's 2010 growth projection to 3.6 percent from the previous 2.5 percent, saying that Asia's fourth largest economy will benefit more from the upcoming global economic recovery.
The IMF first projected the nation's gross domestic product (GDP) would shrink by 4 percent in February, but raised this by 1 percentage point to minus 3 percent in July. Following a two-week consultation with Korean government officials in August, it revised its outlook again, saying that economic output will contract 1.8 percent.
This means the IMF has been revising its growth projection every month from July through September, raising questions about its credibility.
In its latest report, the IMF also said the world economy will shrink 1.1 percent this year, compared with a 1.4 percent decline projected in July. In 2010, the global output is forecast to grow 3.1 percent from a year earlier, higher than the previous projection of 2.5 percent two months ago.
The IMF estimated the U.S. economy to contract 2.7 percent this year but expand 1.5 percent in 2010. Japan, the world's second largest economy, is expected to shrink 5.4 percent in 2009 but expand 1.7 percent the following year.
"The global economy appears to be expanding again, pulled up by the strong performance of Asian economies and stabilization or modest recovery elsewhere. In the advanced economies, unprecedented public intervention has stabilized activity and has even fostered a return to modest growth in several economies," the IMF said.
It then said emerging and developing economies are generally further ahead on the road to recovery led by resurgence in Asia, adding the recent rebound in commodity prices and supportive policies are helping many of these economies.
"But the pace of recovery is slow, and activity remains far below pre-crisis levels. The policy forces that are driving the current rebound will gradually lose strength, and real and financial forces, although gradually building, remain weak. Specifically, fiscal stimulus will diminish and inventory rebuilding will gradually lose its influence. Additionally, consumption and investment are gaining strength only slowly as financial conditions remain tight in many economies."
Advanced economies are projected to expand sluggishly through much of 2010, with unemployment continuing to rise until later in the year, it said. "In emerging economies, the rebound is driven by China, India, and a number of other Asian economies. Other developing economies are staging modest recoveries."
The IMF suggested governments around the world should maintain fiscal support while safeguarding fiscal sustainability. "Fiscal stimulus needs to be sustained until the recovery is on a firm footing and may need to be extended beyond current plans if downside risks to growth materialize."
At the same time, they need to commit to large reductions in deficits once the recovery is on a solid footing and must start addressing long-term fiscal challenges by advancing reforms."
The world also needs to heal financial sectors while reforming prudential frameworks, it said. "Completing financial sector repair and reform are indispensable for a return to sustained growth. Advanced economies should pay more attention to rising unemployment, while developing economies need to deal with poverty more effectively."