South Korea GDP, Term Paper Example

South Korea’s better than expected performance during the first quarter of 2013 has created uncertainties regarding the Bank of Korea’s (BOK) potential response to it. HSBC economist Ronald Man believes that BOK will increase the interest rate during the fourth quarter of 2013. He also expects the Korean economy to grow at an annual rate of 3 percent this year while the growth rate next year will be 3.8 percent. HSBC is more optimistic regarding economy’s growth rate than the market (Kumar, 2013).

On the other hand, Capital Economics Asia economist Gareth Leather expects BOK to cut rates by 0.25 points to ensure recovery in exports is sustainable. Gareth’s current rate annual economic growth rate forecast is 2 percent which is below the market and the government’s expectations. Gareth’s pessimistic forecast is also due to his belief that private consumption will remain low. The third camp is RBS whose economist Erik Lueth believes that BOK will leave the interest rate unchanged at least until second half of 2014. ING’s head of Asian research Tim Condon also expects the interest rate to remain unchanged.

While MarketWatch is a widely read website for financial news, I immediately noticed that the article did a poor job of explaining the concepts to those who may not have business or economic background. Thus, MarketWatch articles are only useful to those who are already familiar with economics or financial concepts. In this regard, Wall Street Journal does an amazing job of educating the readers even if they may be familiar with economics or financial concepts. Another issue with the article is that it had a chart on the article page but it was missing labels and I never figured out what it was indicating.

This article talks about the monetary policy concept and helps us understand the importance of interest rates set by country’s central banks. This article also helps us understand how the future expectations regarding interest rate also tell us about individuals’ expectations regarding the current and future state of economy. Banks keep interest rates lower to boost the economy by encouraging companies to borrow for investment and consumers to engage in consumption. BOK, like other central banks, have also kept interest rates lower to recover the economy. But lower interest rates can also lead to speculation and even inflation if kept too long, thus, banks have to closely monitor the economy.

It is not surprising that HSBC’s Man expects BOK to raise interest rate because he has more optimistic future expectations as compared to the market. Man believes that the objectives have been achieved and the economy can continue to perform even without lower interest rates. On the other hand, Capital Economics’ Leather has more pessimistic view of the economy and believes that the real recovery process has yet to start and it may be too soon to increase interest rates. He also believes that even though exports lifted up economic growth rate during the first quarter, they cannot be relied upon to do the same unless given boost through even lower interest rate which is why he expects a cut by the bank.

RBS’ Lueth has the middle view and believes that recovery is in progess, hence, the interest rates will remain unchanged. It is reasonable to assume that Lueth doesn’t see any danger of too high inflation rate or excessive speculation. It is also possible Lueth’s future expectations regarding economic growth rate may be in line with the government’s own estimations at the moment.

Reference

Kumar, V. P. (2013, April 25). South Korea GDP growth splits market on policy rate outlook. Retrieved April 25, 2013, from http://blogs.marketwatch.com/thetell/2013/04/25/south-korea-gdp-growth-splits-market-on-policy-rate-outlook/