Think tank cuts growth outlook to 2.4%

By Choi Kyong-ae

The Korea Economic Research Institute (KERI) has made a downward revision of the country’s growth outlook for this year, citing China’s slowdown and Koreans’ lack of spending as core reasons.

On Tuesday, the economic think tank revised its growth outlook down for this year to 2.4 percent from the earlier forecast of 2.7 percent. It also forecast that the economy will grow 2.6 percent next year.

“A longer life expectancy and the burden of growing debt will further weigh on consumer spending. China’s slowing economy and a weakening yuan will have an impact on exports to China and Korean exporters’ bottom-lines,” according to a KERI report released.

Driven by the government’s stimulus packages which lowered borrowing costs at financial institutions, and the central bank’s four rate cuts since August last year, household debt soared and the benchmark interest rate fell to a record low of 1.5 percent.

But the moves failed to revive spending due to increased external uncertainties such as the uncertain timeframe of U.S. rate increases, China’s slowdown and the deteriorating business environment in terms of exports.

From January to August, exports plunged 6.3 percent to $353.5 billion compared to a year-ago. Household debt reached 1.13 quadrillion won ($946 billion) at the end of June, jumping from 1.09 quadrillion won at the end of 2014, according to data from the Bank of Korea (BOK).

“Exports are expected to remain weak throughout the year due to growing uncertainties involving China’s declining demand,” the report said.

For the whole of this year, exports are set to decrease by about 5 percent compared to 2014. Last year, Korea made exports worth $572.6 billion, BOK data showed.

In its revised economic outlook in July, the BOK forecast exports will fall 4.3 percent this year from a year earlier. But the figure is subject to another downward revision next month given the current downward trend.

In the same month, the BOK cut its growth outlook for this year to 2.8 percent from its April forecast of 3.1 percent.

Though the shrinking of exports is the biggest obstacle to economic recovery, BOK Governor Lee Ju-yeol said last week he didn’t see the economy falling to the lower end of 2 percent this year.

Lee said it’s time to closely monitor and prepare to minimize a possible impact on the Korean economy by the planned U.S. rate hikes later this year and other downside risks.

His remarks are interpreted by analysts as a signal that the central bank may not cut its key interest rate this year so it can support growth. Foreign brokerages and some Korean analysts have issued reports asking further rate cuts to boost spending in Asia’s fourth-largest economy.

Korea’s consumer inflation is expected to rise 0.8 percent this year and 1.5 percent next year. Its current account surplus is forecast to reach $105.4 billion this year, up from $89.42 billion a year earlier, the report said.