The South Korean economy will likely grow at a slower pace than previously anticipated this year as slumping exports sap its overall recovery, a state-run think tank said Wednesday.
The Korea Development Institute downgraded its growth forecast for Asia’s fourth-largest economy to 3 percent this year from an earlier estimate of 3.5 percent.
The latest prediction is lower than the 3.1 percent growth estimated by the Bank of Korea in early April and much lower than the mid-3 percent range being targeted by government policymakers. The South Korean economy expanded 3.3 percent on-year in 2014.
Growth will depend on the execution of effective fiscal and monetary policies and the government’s ability to push forward key reforms, the KDI said, adding that if such conditions are not met, actual growth for this year may hover in the high 2 percent range.
“There are positive signs in regards to consumer spending and investments, but there are considerable downside risks pulling down the economy,” said Kim Seong-tae, head of KDI’s economic outlook team. “A drop in crude prices and reviving demand for homes are also good indicators.”
The researcher said that while the government needs to maintain the current expansionary spending posture and push for reforms, policymakers should exercise restraint in introducing new measures to prop up the economy if a steady recovery takes place. The warning comes as some in the government hinted at asking parliament for a supplementary budget.
Elaborating on downside risks, he said little progress has been made in reforming the civil service pension system and the labor market, while inability to reduce household debt is a source of concern.
In light of the present situation, Kim said it may be advisable to lower interest rates that can inject more liquidity into the market. He then predicted that the central bank may opt to lower rates two more times in the second half, if conditions do not improve.
Lowering rates is important because developments like the rapid aging population is limiting consumer spending, even though a drop in crude prices bolstered purchasing power of ordinary people.
On exports, a critical growth engine for South Korea, the KDI said shipments are being hurt by slower growth in China and emerging markets, and the weakening of the Japanese yen and euro.
“Exports may rise 1.1 percent on-year in 2015, while imports may rise 2.6 percent,” the research institute said. It added the country is expected to post a large surplus this year and in 2016. South Korea’s trade surplus should top US$110 billion in 2015 and hover around $100 billion next year.
South Korea’s consumer prices may rise 0.5 percent this year, with the core inflation rate reaching 2.1 percent, compared with earlier forecasts of 1.8 percent and 2.3 percent, the think tank said. It said more than 300,000 new jobs will be created this year, with the annual jobless rate standing in the mid-3 percent range, unchanged from the year before.
The KDI downgrade comes as the International Monetary Fund and the National Assembly Budget Office both lowered their forecasts of South Korea’s economic growth to 3.1 percent and 3 percent, respectively, in recent weeks.
Others, including Nomura Securities Co., predicted 2.5 percent growth, while HI Investment and Securities Co. said 2.9 percent is likely for 2015.
The KDI also said South Korea’s economic growth may edge up to 3.1 percent in 2016, with consumer prices gaining 1.4 percent on-year.
With the likelihood of more global trade, the country’s outbound shipments may expand 2.9 percent next year, with imports moving up 3.3 percent, it said. (Yonhap)
