South Korea cuts 2016 growth forecast; pins hopes on consumption

DEC 16, 20159:23 AM

[SEJONG] South Korea cut its economic growth forecast for next year, pinning its hopes on domestic consumption paving the path to expansion - with minimal help seen likely to come from stagnant exports.

The Ministry of Strategy and Finance forecast the economy would grow by a real (inflation-adjusted) 3.1 per cent next year, slightly down from the 3.3 per cent estimated earlier this year.

It said on Wednesday that the effects of recent interest rate cuts and falling global oil prices were expected to boost consumer spending, and it plans to keep expansionary policy settings in place to keep the economy afloat.

It also forecast this year's growth at 2.7 per cent, matching the Bank of Korea's current forecast for this year. "Offshore circumstances aren't currently the best. Global trade is said to be improving, but it may not be enough (for us) and there are uncertainties linked to the pending U.S. rate hike," Jeong Eun-bo, a deputy minister at the finance ministry, told an embargoed news conference.

Consumer sentiment may continue picking up, but South Korea faces risks from a shrinking working population that is also ageing rapidly. The economically-active population is expected to peak next year and start falling in 2017.

South Korean households' real average propensity to consume, a measure of how much of their income they spend on goods and services, last year fell to its lowest per centage since 1998, according to Statistics Korea.

Growing household debt may also restrict spending power next year, especially if interest rates start creeping up in South Korea - if and when the Fed raises rates.

South Korea's current policy rate is at a record-low 1.50 per cent after the Bank of Korea lowered it in four 25-basis point steps from last year.

The most recent cut took place in June this year, while analysts' policy forecasts are currently split between no change for a prolonged period of time and another rate cut early next year.

The ministry added it would make the nationwide discount sales it promoted in mid-November into a regular event, as well as working to attract more Chinese tourists, because the economy could no longer rely solely on exports for growth.

Exports, which have traditionally driven South Korea's economic expansion, are expected to fall 7.3 per cent this year as global demand cools and growth slows in China, its biggest trade partner, the finance ministry said.

The ministry sees consumption sending annual inflation to 1.5 per cent next year, revised up from 1.3 per cent estimated earlier.

REUTERS