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Asia Pacific Economy
South Korea cuts growth forecasts
From the Financial Times of Mon, 22 Dec 2014 04:30:33 GMT
A woman pushes a cart through a market in Seoul©Getty

South Korea has lowered its bullish growth forecasts for this year and next, citing weaker than expected domestic consumption, while it is considering lifting some capital control measures to protect itself against higher US interest rates.

The finance ministry revised down its growth expectations for next year to 3.8 per cent from its July estimate of 4.0 per cent. It also downgraded its growth forecast for this year from 3.7 per cent to 3.4 per cent.

The move highlights the difficulties the government faces in boosting weak domestic demand through stimulus measures. Exports are falling amid cooling demand from China, South Korea’s biggest exporting destination.

Lee Chan-woo, the ministry’s director-general, said consumer and business sentiment had been weaker than expected because of economic uncertainty. “Our policies have remained expansionary but consumer and investment sentiment in the private sector did not improve as much as they should have,” he told reporters.

Choi Kyung-hwan, who took office as finance minister in July, has launched a $40bn stimulus package and announced a record budget plan for next year after the April ferry disaster, which cost more than 300 lives, weighed on consumer spending.

The Bank of Korea cut interest rates twice in recent months, most recently in October to a record low of 2.0 per cent, in an effort to boost consumption. However, domestic spending remains weak due to structural reasons such as high housing prices and costly private education. Making matters worse, exports, which account for more than half of gross domestic product, fell 1.9 per cent in November from a year earlier, hit by the weaker Japanese yen

The government expects economic conditions to improve next year on the back of the global economic recovery but economists say even the revised growth forecasts are too optimistic, citing the gloomy export outlook. Korean manufacturers are increasingly squeezed between lower-cost Chinese competitors and Japanese rivals helped by the weaker yen in sectors including cars, electronics, steel, chemicals and shipbuilding.

“Slowing exports are a bigger concern than weak domestic spending because it is an export-driven economy,” said Kwon Young-sun, economist at Nomura. “There is a limit in boosting growth with domestic consumption, given the relatively small size of the domestic economy. There is basically no alternative when exports start to go downhill.”

Mr Kwon expects two more rate cuts by the BoK in the first quarter of next year, while many economists expect the government to draw up a supplementary budget to boost growth.

Meanwhile, the government is considering easing limits on currency forward trades for banks amid growing concerns over capital outflows, and seeking ways to induce more foreign investment including exempting foreigners from a bond withholding tax. The new measures are expected to be announced in the first quarter of next year.

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