Korea Cuts Growth Forecasts as BOK Faith in 2H Recovery Weakens

(Bloomberg) -- President Moon Jae-in's government lowered its growth forecast for this year as South Korea's economy continues to be battered by a downturn in the tech cycle and global trade woes.

The finance ministry sliced 0.2 percentage point of its projection for growth this year to 2.4% to 2.5% in its second-half policy statement released Wednesday. The government also slashed its inflation projection to 0.9% from 1.6%, taking account of feeble price gains seen so far this year.

The downgrade highlights the vulnerability of Korea's economy to external forces, an issue Moon has repeatedly flagged as he tries to re-orientate the economy more toward domestic demand. Analysts said the latest revisions to growth still look too hopeful, while Bank of Korea board member Koh Seung-beom said confidence in a pickup later in the year was weakening.

The latest revisions could strengthen speculation that the BOK will cut interest rates at its meeting later this month to support the economy. Koh told reporters that monetary policy needed to take into account low inflationary pressure and growth rates.

Government help for the economy in the form of an extra budget is currently stuck in legislative gridlock. Finance Minister Hong Nam-Ki ruled out the putting together of any additional package this year.

“The slump in exports and investment has worsened because of our economy's tendency to be impacted largely by the global economy,” Lee Eog-won, director general for economic policy, told reporters in Sejong, South Korea, following the downgrades. “The U.S.-China trade tensions are fortunately easing a bit, but the negotiations aren't ending, only restarting, so we have to watch how they will progress.”

The finance ministry's latest growth projection is based on the assumption that the 6.7 trillion won ($5.8 billion) extra budget will be approved in parliament. No progress has been made on the budget since it was submitted to parliament in April as the ruling and opposition parties wrangle over other political issues.

Unrealistic Projection

But even with the extra budget, some economists see the lowered growth projection as unrealistic. The median estimate of economists surveyed by Bloomberg is 2.2% for growth in 2019.

“It's still too optimistic,” said Stephen Lee, an economist at Meritz Securities Co. “The Moon Jae-in government should reverse its stance on construction and expand re-development of metropolitan areas, otherwise 2.4% will be difficult to achieve,” Lee added, pointing to the government's reluctance to goose growth through traditional spending channels.

He said the impact of the stalled extra budget wouldn't be very large, while exports could be hurt more, meaning there were more downward risks for growth than upward factors.

South Korean exports fell in June for the seventh straight month, with semiconductors, a primary growth engine for the nation, again plunging by around a quarter from a year earlier. The slowing demand for South Korean products led companies to cut capital spending, the ministry said.

Hong said that moves by Japan to restrict some technology exports to Korea over a long-running conscripted labor dispute would not affect GDP. He added that Korea needed to lessen its dependency on its neighbor for certain tech items.

Japan Plans to Curb South Korea Exports Over Colonial-Era Claims

The one brighter spot in the release was a higher forecast for job creation. While the government's minimum wage hikes have been slammed for increasing unemployment rather than raising incomes, the latest report said about 200,000 new jobs will be created this year, compared with a previous forecast of 150,000.

To contact the reporter on this story: Sam Kim in Seoul at skim609@bloomberg.net

To contact the editors responsible for this story: Malcolm Scott at mscott23@bloomberg.net, Jiyeun Lee, Paul Jackson

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