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South Korea state agency raises 2006 GDP forecast

By Staff
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SEOUL, Apr 16 (Reuters) South Korea's top government research agency on Sunday raised its economic growth forecast for 2006 on expectations of a continued domestic demand recovery and resilient export growth.

The Korea Development Institute (KDI) forecast gross domestic product (GDP) to grow 5.3 percent in 2006, faster than its previous estimate of 5.0 percent, following a 4.0 percent expansion in 2005.

The agency's new forecast is more optimistic than the finance ministry's and the central bank's prediction of 5.0 percent.

However, the institute said it was uncertain whether Asia's fourth-largest economy would continue the current pace of expansion beyond 2006.

''There are possibilities that economic growth led by domestic demand recovery could be difficult,'' said the agency in a statement.

''It is also uncertain whether exports would remain brisk until the next year, with chances of a slowdown in economic growth in the United States and China.'' The research agency also drastically lowered its forecast of this year's current account surplus to .1 billion from the .4 billion surplus estimated previously in December 2005, because of a stronger won and growing consumer spending.

This is much lower than the central bank's forecast of a billion surplus, which was also revised down last month from the initial prediction of a billion surplus.

The institute also said the central bank would not be too pressured to raise interest rates, following three quarter-of-a -percentage-point rate hikes since October last year, given tamed inflation and uncertain economic conditions in 2007.

''(The central bank) needs to be cautious in deciding the timing of further interest rate hikes, considering the current inflation picture,'' the agency said.

The Bank of Korea raised overnight call rate target by a quarter of a percentage point in October, December and February. They stand at 4.00 percent.

The bank vowed to continue gradual monetary tightening cycle to pre-empt inflation as the economy picked up, while debt market participants expect the fourth rate hike could come in May or June.

The next rate meeting is due on May 11.

South Korea's annual core inflation, which strips out volatile food and energy, was 1.6 percent in March, the slowest since June 2000.

The finance ministry said in a separate statement that there was little risk of the economy falling into a ''double-dip'' -- where the economy slips back into a slump after only a brief rebound.

But it said it could not rule out the possibility that sustained strength in oil prices and a firm South Korean won could hurt companies' profitability and foreign trade conditions, denting overall economic growth.

REUTERS PV PM1221

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