Will recession end during 2nd quarter?

1. KERI`s report on economic outlook

The Korea Economic Research Institute (KERI), which is affiliated with the Federation of Korean Industries, estimated that the nation`s economy would pass through the tunnel of prolonged recession during the second quarter this year.

In its Apr. 22 report, KERI said that it is certain that the Korean economy bottomed out during the first quarter based various economic indicators. It contradicts the recent report released by the state-run Korea Development Institute, which lowered its projection of economic growth rate, saying that the economic might not recover even in the second half.

KERI said that its projection for economic recovery is based on various consumer-related indicators, including department store sales, imports of consumer goods and the consumer expectation index. Also, Korea`s exports to Southeast Asia and Europe are rising steadily, it said.

``The economic growth rate, which excludes seasonal factors, would rebound in the second quarter,`` said Huh Chan-Kook, head of KERI`s macroeconomic research team. ``Unless the overseas factors do not deteriorate any further, corporate facilities investment will increase from the second half.``

KERI lowered the projection for this year`s economic growth rate to 4.2 percent from 4.5 percent forecast at the end of last year. On the other hand, the institute raised the inflation estimate to 4 percent from the previous 3 percnet. Also, the nation`s current-account surplus will reach US$13 billion, and the exchange rate will reach its peak during the second quarter and slide on a gradual basis, stabilizing at about 1,250 won per dollar at the year`s end.

However, KERI pointed out that the growth rate could drop further and that the economic recession might be prolonged because these projections are based on the condition that corporate and financial restructuring will be carried forward as scheduled.

2. Voluntary restructuring `got stuck`

In late January, representatives of seven industries that are suffering from chronic over-capacity, such as synthetic fiber and petrochemicals, declared their participation in voluntary restructuring. For this reason, the involved companies are suffering from sluggish sales, as well as price declines.

Industry sources said Apr. 22 that these industries have started to cut their production through reduction in plant utilization ratio and extension of repair period, as their profitability has deteriorated. Unless they find a way to pursue a rational restructuring, insolvency of companies in these industrial fields will accelerate.

Domestic demand for steel bars declined 15 percent during the first quarter to 1.73 million tons, while its exports fell by as much as 23 percent to 160,000 tons. In this connection, output by the nation`s leading steel mills such as Inchon Iron and Steel and Dongkuk Steel Mill dropped 9 percnet to 1.83 million tons.

Chemical fiber manufacturers cut their production from the end of last year in order to boost the price of polyester fiber and reduce stocks. In particular, five out of 14 member companies of the domestic synthetic fiber manufacturers association are placed under workout or court receivership, so they are in a critical condition, and mergers and acquisition among manufacturers look vital.

Last month, the domestic petrochemical industry saw its average plant utilization ratio fall 0.4 percentage point to 90.5 percent in synthetic fiber section. Also, the utilization ratio of synthetic materials declined by 1.8 points to 88.1 percent.

Park Won-Jae parkwj@donga.com