SEJONG, SOUTH KOREA: South Korea cut its bullish growth forecasts for both this year and next but its revised projections were still seen as too optimistic, supporting expectations of an interest-rate cut early next year.
The Ministry of Strategy and Finance forecast on Monday the economy will grow by 3.4 per cent this year, down from 3.7 per cent projected in July, with private investment and/sentiment turning out weaker than the government had expected.
It also downgraded its 2015 growth forecast to 3.8 per cent from 4.0 per cent.
“3.8 per cent seems a bit too high. Growth next year should be similar to this year around 3.5 per cent while we still see a rate cut sometime early 2015,” said Kim Doo-un, an economist at Hana Daetoo Securities.
Lee Chan-woo, director-general at the ministry, said sentiment among businesses and households had been weakened by uncertainties over future economic conditions, pulling down the previous forecasts.
“Third-quarter growth was mainly propped up by government stimulus measures,” Lee told a briefing, referring to a raft of legal revisions and new policies launched under Finance Minister Choi Kyung-hwan, dubbed “Choinomics”.
Expecting things to improve next year, the finance ministry sees domestic consumption rising 3.0 per cent on an annual basis, which would be the fastest since the 3.7 per cent growth seen in second-quarter 2011.
A supplementary budget is likely to be in the works as well, economists believe, while the ministry is scheduled to soon announce structural reforms in the labour market aimed at bringing more stability to temporary jobs.
“We think that if the Korean government feels the need for a supplementary budget, it will likely be announced in first-half 2015,” said Ronald Man, an economist at HSBC Hong Kong. Man sees two rate cuts pending next year, and further expects the government’s forecasts to be revised down throughout the year.
Spending at home is expected to get a fillip from falling oil prices, a boost in welfare payments, and government plans to increase household income.
The government calculates consumption will swell inflation to 2.0 per cent next year, from 1.3 per cent this year, with a 0.6 per cent point boost coming from a hike in cigarette prices.
Inflation has remained low for the past year in South Korea on low commodity and agricultural product prices, prompting/sworries about the economy falling into deflation, but the ministry is confident the economy will improve enough to restore price growth.
