Calls for new stimulus grow as growth outlook darkens

Calls are growing for Korea to take bolder steps to support the economy, after a string of recent economic data indicated that Asia’s fourth-largest economy may be in for a rougher than expected ride this year. 

Private experts, increasingly doubtful of the government-projected recovery path for the economy, are slashing their forecasts for Korea’s economic growth in 2016. 

Local think tanks and foreign investment banks now predict that the economy, as measured by gross domestic product, will grow at an annual rate of between 1 percent and 2.6 percent. 

That compares with the Korean government’s 3.1 percent projection, made in December, and the Bank of Korea’s projection of 3 percent, cut in January from the previously forecast 3.2 percent. 

The economy expanded 2.6 percent in 2015. 

Goldman Sachs, in a recent report, revised down its forecast for Korea’s GDP growth in 2016 to 2.4 percent from 2.6 percent, saying the economy will probably expand 0.3 percent, not the previously projected 0.5 percent, in the first three months of this year. 

Morgan Stanley warned that the full-year rate could dip to as low as 1 percent. 

The Seoul-based Korea Economic Research Institute is holding onto its earlier projection of 2.6 percent GDP growth this year, the highest among those surveyed. But it warned that Korea will likely see its annual growth confined to the 2-percent range until 2010. 

“Korea’s economy will likely attain 2.6 percent annual growth, as previously forecast, as domestic consumption, bolstered by the government-led efforts, offsets weakening exports,” the think tank said in a report released Sunday. 

The Finance Ministry has so far resisted calls for fresh stimulus, saying it will instead focus on its plan to spend nearly half of its annual budget in this quarter ending in March. 

On March 9, Finance Minister Yoo Il-ho said he was not considering supplementing the budget, saying it would do more harm than good to the economy.

The Bank of Korea is standing pat on its interest rate policy, keeping the base rate unchanged at a record-low 1.5 percent for the ninth consecutive month in March. 

“Major economic indicators are pointing at a trend of continued weakness,” said Park Chong-hoon, chief economist at Standard Chartered Bank Korea. 
“The looming elections (on April 13) may complicate the process for political consensus, but we believe that Korea’s economy is in a condition that requires a major fiscal response,” he said in a research note. 

Both the government policymakers and private experts will keenly watch data to be released this week for any hint of improvements in the economy, which in the first two months of this year were in doldrums. 

Industrial output fell for a third consecutive month in January. Exports extended their period of monthly declines to the longest stretch on record, plummeting 12.2 percent in February from a year ago. Consumer sentiment fell to an eight-month low in February, while youth unemployment soared to an all-time high of 12.5 percent in the same month. 

Data on March consumer sentiment is set to be released Tuesday, February industrial output on Thursday, while updates on exports and consumer prices for the current month are scheduled for Friday.

By Lee Sun-young (milaya@heraldcorp.com)