U.S., global economy likely to weigh on Korea

Korea is expected to face an uphill recovery toward the trend of 4 percent growth on lower economic prospects of the U.S., one of Korea’s top trading partners.

The U.S. is expected to grow 1.7 percent this year, down from the International Monetary Fund’s initial forecast of 2 percent, according to the fund’s draft on the global economic outlook obtained by Bloomberg.

The report, due to be released next week, said that the across-the-board spending cuts in the U.S., also known as the sequester, will add downward pressure on consumption, thus to weigh on the country’s gross domestic product.

The Bank of Korea, meanwhile, revised downward its growth projection for Korea to 2.6 percent from the previous 2.8 percent projected early this year on a growth forecast of 1.8 percent in the U.S., down from 2.2 percent in 2012.

A report by the central bank showed that the global economy is expected to grow 3.3 percent, below the IMF’s expected revision of 3.4 percent and down from 3.5 percent initially projected early this year.

The central bank’s growth forecast comes after the Ministry of Strategy and Finance’s revision to 2.3 percent from 3 percent.

The Fund is expected to keep the eurozone’s growth forecast the same at minus 0.2 percent, while the BOK projected a contraction of 0.4 percent.

“The road to recovery in the advanced economies will remain bumpy,” the Fund’s draft reported as quoted by Bloomberg. “The weak ending to economic activity in 2012 and the sluggish beginning in 2013 highlight that important brakes remain in place.”

Despite further slowdown projections both at home and abroad and persistent external pressure for a rate cut, the central bank left its benchmark interest rate unchanged for the sixth straight month.

BOK Governor Kim Choong-soo said that the central bank will abide by its main responsibility by law of maintaining stable consumer prices through monetary policy, while noting of a recovery in Korea and abroad toward the latter half of this year as its reason for freezing the key rate.

Its policy decision signified its independence from outside pressure, analysts said which has been gaining traction following the Finance Ministry’s low-growth forecast.

Analysts said monetary-easing expectations may continue on low inflation, but inflation could rise driven by global recovery in the second half of this year.

“The world economy will also be on a more solid footing by the end of this year as the U.S. fiscal drag starts to ease and Europe makes progress on its debt crisis,” Moody’s Investors Service said in a report.

“These factors would prompt the BOK to look towards tightening policy to anchor inflation expectations.”

By Park Hyong-ki (hkp@heraldcorp.com)