South Korea's central bank cuts growth forecast

SEOUL, South Korea – South Korea’s central bank lowered its growth forecast for Asia’s fourth-largest economy on Tuesday, citing the country’s weak first-quarter economic performance and a downgrade in the global economic outlook. But it kept its policy rate steady for this month.

The Bank of Korea said that South Korea’s economy will likely expand 2.8 per cent this year over a year earlier, down from the 3.0 per cent expansion predicted in January, but an improvement from 2015 when South Korea’s economy eked out 2.6 per cent growth.

The forecast reinforces worries the economy is on the cusp of a low-growth period.

The bank revised its inflation outlook to 1.2 per cent from 1.4 per cent.

Last week, the International Monetary Fund revised its forecasts for global growth in 2016 to 3.2 per cent from the 3.4 per cent predicted in January. It also downgraded its outlook for major economies including the United States, Japan and Europe.

South Korea’s exports have suffered due to softening demand from China, its top trading partner. Steelmakers and shipbuilders posted losses last year while the fall in crude oil prices reduced the value of exports by South Korea’s oil refining companies.

The central bank governor, Lee Ju-yeol said South Korea should see a modest recovery during the rest of the year, thanks to signs of improvement in the Chinese economy and a modest recovery in crude oil prices.

But, “While those uncertainties have lessened, it is difficult to say that they are fundamentally resolved,” Lee told reporters.

The central bank expects exports to improve thanks to the recovery in advanced economies. But the improvement would not be strong enough to support a full recovery, so South Korea’s economy must rely mostly on domestic demand.

Sectors that suffer from overcapacity and weak global demand, such as shipping, are due for an overhaul.

Though the bank kept its monthly policy rate at a record low 1.5 per cent, expectations are growing of another rate cut, following two cuts last year.

Some analysts said the revised forecast was a tad optimistic.

“The BOK’s downgraded outlook still remains optimistic as exports will likely decline further, the housing market continues to taper off and elevated corporate credit risks should reduce business investment. All of these downside risks should more than offset resilient private consumption,” said Kwon Young Sun, an analyst at Nomura International.