South Korea lowers growth outlook for 2015 citing weak consumption, investment

SEOUL, South Korea – South Korea lowered its growth forecast for next year, citing persistently weak sentiment among consumers and businesses. But the government predicted that overall economic conditions will improve from this year thanks to government measures, recovery in the U.S. economy and the fall in oil prices.

The finance ministry said Monday that Asia’s fourth-largest economy will expand 3.8 per cent in 2015. Six months ago, it forecast growth of 4.0 per cent.

It also lowered its forecast for this year to 3.4 per cent growth from the previous forecast of 3.7 per cent. In 2013, South Korea’s economy expanded 3.0 per cent.

The downward revision, which still represents an improvement from the growth estimated for this year, shows the government’s challenge in encouraging consumers to spend more and businesses to boost investment despite its expansionary policies and the central bank’s two rate cuts this year.

Director-General Lee Chanwoo said the recovery in consumer spending and capital expenditure remained weaker than expected in the last two months as consumers and businesses still have great uncertainties about next year. The economic improvement in the last quarter stemmed mostly from the government policies.

The government will introduce measures next year to boost wages and to push businesses to use their cash reserves to create jobs and increase investment, he said.

As one of those measures, the country’s national pension fund will play a more active role as a shareholder to pressure companies to increase dividends.

The government will also seek to increase minimum wages and spend nearly 60 per cent of its annual budget during the first half of next year.

Lee said these measures will boost domestic demand and also reduce the economy’s reliance on exports. South Korea’s growth was mostly driven by exports of goods, such as cars and televisions, but the government has been trying to boost domestic demand. Next year, the contribution of domestic demand to growth will outpace that of exports according to Lee.

The improvement in the U.S. economy will likely boost South Korean exports, while the drop in the price of oil is expected to boost consumption.

The government revised the inflation rate for next year to 2 per cent to reflect the scheduled hike in cigarette tax and the fall in oil prices. This year’s inflation rate is expected to be 1.3 per cent.