South Korea’s central bank yesterday lowered the country’s growth outlook for this year by a wider-than-expected margin, a day after trimming its key rate to guard against Europe’s fiscal crisis.
The Bank of Korea said the South Korean economy is forecast to expand 3 percent this year from a year ago, further reducing outlook from its April forecast of 3.5 percent. The central bank cited nagging debt woes in Europe hitting exports, as well as lingering household debt that is putting pressure on domestic spending in Asia’s No. 4 economy.
The revised outlook will mark South Korea’s slowest annual growth since 2009.
An outlook cut was widely expected after the central bank trimmed its key interest rate for the first time in more than three years by a quarter of a percentage point to 3 percent on Thursday. Bank of Korea Governor Kim Choong-soo said the rate cut was a pre-emptive move to buoy growth as the actual growth in the South Korean economy is feared to trail its potential for a while. However, analysts were surprised the bank cut its outlook so steeply.
The Bank of Korea is now more pessimistic than the South Korean finance ministry, which lowered the country’s outlook to 3.3 percent from 3.7 percent. The IMF also is more optimistic than the central bank, forecasting 3.25 percent growth. The bank’s outlook would have been bleaker if the government had not decided to increase spending during the second half. The central bank says that accounts for 0.2 percentage points of the estimated growth.
“Despite the stabilization in the global oil prices, the uncertainty in Europe’s fiscal crisis is extending the unrest in the global financial market and is slowing growth in developed and emerging economies,” said Kim Jun-il, the bank’s deputy governor.
As Europe’s fiscal crisis continues to dent South Korea’s exports to emerging markets and developed countries, the country’s economy will rely more on domestic private spending than on exports for the rest of the year, the central bank said.
Yet even the growth of private consumption will be more moderate than previously expected, the central bank said, due to household debt and a housing market slump.