BOK cuts 2019 growth outlook to 2.6%

BOK Governor Lee Ju-yeol bangs a gavel at a Monetary Policy Board meeting at the bank, Jan. 24. Courtesy of Bank of Korea

Key interest rate unchanged at 1.75 %

By Lee Kyung-min

The Bank of Korea (BOK) lowered its growth outlook for 2019 to 2.6 percent from an earlier forecast of 2.7 percent, citing lingering uncertainties over the U.S.-China trade feud and a global slowdown, the central bank reported Thursday.

It left the key interest rate unchanged at 1.75 percent the same day. For 2020, the central bank also expects the economy to grow 2.6 percent.

The BOK's revision came about three months after it revised down the figure to 2.7 percent in October 2018.

“The downgrade reflects overall changes in global economic conditions with growth pace becoming slower. While the figure was revised down, the country will maintain growth momentum similar to that of 2018,” BOK Governor Lee Ju-yeol said at a press briefing.

“We expect increases in consumption and exports amid continued operation of the government's expansionary fiscal policies.”

Economists said that the downgrade is a strong indicator that Korea will face harsh economic conditions later.

“The revision came only three months after the last one, which had also been revised down. The continued downward revision only proves that the situation will become worse and worse,” said Yun Chang-hyun, a business professor at the University of Seoul

The central bank said that construction investment is likely to drag down the Korean economy as it is expected to continue to decline through 2020, a major concern undermining corporate investment.

“Non-residential building construction including commercial buildings and offices is expected to be sluggish, although the extent of its decline should gradually lessen,” it said in a statement.

However, facilities investment is expected to rebound, as IT investment is expected to undergo an adjustment in the first half of 2019.

“The first half of the year will be hard but a recovery will come in the second half, due mostly to expected improvement in demand in the semiconductor industry,” it added.

“The non-IT sector will have an investment level similar to a year ago, with the amounts of new investment expected to vary across different industries.”

However, experts said the central bank's outlook for the chip industry is too optimistic, given that there are lingering uncertainties surrounding the economy.

“The BOK's projection is based on the assumption that chip sales will improve which is simply not a given,” Yun said.

“If the market conditions and global demand veers off course from earlier projections, then the BOK can and will change their words again. What remains certain is that the economy in 2019 is heading for a hard hit.”

The central bank expects the number of new jobs to increase by 140,000 in 2019, up from last year's 97,000.

Private consumption is forecast to see moderate growth, although the rate will be lower than last year's.

“Increases in household income will slow due to a decline in the rate of nominal wage growth.”

Overseas, lingering uncertainties about the U.S.-China trade dispute will continue to dampen consumer sentiment, it added.

“Consumer sentiment is unlikely to improve significantly in the short term, because of concerns about the economic slowdown and uncertainties about the U.S.-China trade dispute.

The BOK expects that consumer prices will jump 1.4 percent in 2019, 0.3 percentage points lower than the initially projected 1.7 percent made in October 2018. The rate is forecast to rise 1.6 percent in 2020, it added.

“The decline in international oil prices will limit the rise in consumer prices. The increase in import prices is also expected to weaken, due to the lower prices of international oil than last year and the tighter global economic conditions.”

The central bank forecast that the current account will record a surplus of around $69 billion in 2019 and $67 billion in 2020.

While the current account will remain in surplus, the amount will drop, because the goods account is expected to shrink.

“Despite the drop in international oil prices, Korea's major export items will continue to see deterioration. As for the services account, the travel and construction accounts will likely improve but the transport account will continue to be in a deficit,” the central bank said.