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Thu, Dec 30, 2004 - Page 12 News List

South Korea plans huge boost to public spending


South Korea will drastically increase its public spending early next year in an effort to boost an economy floundering in a prolonged trough with no early recovery in sight, officials said yesterday.

The government will spend 100 trillion won (US$95.9 billion) of its budget during the first half of next year, up 14.3 percent from the same period this year, the finance and economy ministry said.

The plan was based on predictions that private consumption and corporate capital spending may slacken further next year, Lee Seung-woo, head of the ministry's policy planning department, said.

"Priority will be given to creating more jobs and supporting small companies," he said after a high-level economic meeting chaired by President Roh Moo-hyun.

Next year, the government aims to achieve an economic growth rate of 5 percent and a 3 percent inflation rate, he said. The economy is expected to grow 4.7 percent this year, supported by its main driver, exports, but these face slower global demand next year.

Lee said the current account surplus may shrink to US$20 billion in 2005 from US$28 billion this year.

Data released yesterday confirmed the need for action, showing a deep and sustained slump in domestic consumption offsetting still strong exports.

Industrial output grew 10.1 percent year-on-year in November, helped by brisk exports of automobiles and semiconductors, according to the National Statistical Office.

However, private consumption in November fell 1.3 percent, the fifth consecutive monthly downturn after a drop of 2.5 percent in October as retail sales tumbled 3.0 percent following a fall of 1.6 percent.

At the same time, the index of leading indicators, which measure the outlook for the economy six months ahead, was down 0.3 percent from October, when it fell 0.1 percent, pointing to the gathering gloom on the horizon.

Supported by export demand, investment in plant and equipment was up 3.1 percent year-on-year, reversing a 1.2 percent drop in October, led by telecom equipment and precision machinery.

Production of semiconductors and electronics parts grew 28.7 percent year-on-year and automobile output rose 20.8 percent.

Factories operated at 82 percent of capacity, up from 80.1 percent.

Hana Securities economist Kwak Young-hoon said domestic demand would be be mired in a slump until the first half of next year, with investment showing little sign of recovery.

"The November output data point to further deepening of the slump going forward. This weak trend will likely continue until the first half of next year," he said.

Kwak said high oil prices are taking a toll on already weak consumption.

"The manufacturing sector is faring well but services are in a deep slump, eroding overall growth," he said.

"Exports cannot sustain sharp growth and another interest rate reduction looks to be unavoidable," he said.

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