The Korea Herald

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KDI cuts Korea's 2015 growth estimate to 2.6 pct

By KH디지털2

Published : Dec. 9, 2015 - 13:52

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South Korea's leading state-run think tank downgraded the country's growth forecast for 2015 on Wednesday as weak exports continue to weigh down the economy despite a recovery in domestic consumption.
  

The Korea Development Institute forecast that Asia's fourth-largest economy will expand 2.6 percent this year from a year earlier, down from the 3 percent growth it predicted in May.
  

The KDI's growth estimate is lower than the government's official target of 3.1 percent announced in September and even below the 2.7 percent growth estimated by the Bank of Korea in mid-October.
  

The think tank also predicted the economy to grow 3 percent on-year in 2016, down from its earlier target of 3.1 percent and lower than the 3.3 percent and 3.2 percent forecast by the Ministry of Strategy and Finance and the BOK.
  

"Domestic consumption is showing signs of recovery, although the country's export figures are affecting growth," the KDI published in its latest economic outlook report. "While the gross domestic product posted solid gains in the third quarter, overall growth remains gradual."
  

In the January-November period of this year, outbound shipments were down 7.4 percent on-year to $484.6 billion. The drop is partly due to unfavorable overseas developments, like a slowdown in China's growth and weak crude oil costs that are affecting the prices of refined petrochemical products.
  

At the present pace, the country's trade surplus will easily surpass the US$100 billion mark, it said.
  

The KDI also said that while private spending improved in the third quarter following the Middle East Respiratory Syndrome outbreak, the gain is not very strong.
  

First confirmed in late May, MERS claimed 38 lives and seriously hurt consumer demand in the second quarter.
  

On facility investment, the think tank said overall numbers have gone up along with money being poured into the construction sector.
  

The KDI predicted that some 300,000 more jobs may be added to the workforce this year, with average pay rising some 3 percent, which is better than last year.
  

The country's jobless rate should hover around 3.7 percent this year, up from 3.6 percent forecast in May. The updated jobless number is also higher than the 3.6 percent unemployment rate tallied for 2014.
  

The state think tank painted a more optimistic picture of the economy for next year.
  

While consumption should continue to improve in the coming months, exports will remain the country's Achilles' heel, it said.
  

"Economic growth will likely get a boost from low interest rates, weak oil prices and steady growth of the country's real estate market," it said.
  

The KDI, however, said that uncertainties surrounding China and emerging markets can bring down exports, which have traditionally been the country's main growth engine.
  

The think tank said that the country could expect another year of a large trade surplus, with consumer prices likely to edge up into the lower to middle 1 percent range from around 0.7 percent inflation growth in 2015.
  

The number of jobs created in 2016 should hover in the mid-300,000 range, with the jobless rate standing at 3.6 percent, it said.
  

The KDI, meanwhile, said that there is a chance that the global economy can lose steam in the coming year, directly impacting South Korea.
  

The International Monetary Fund estimates that the global economy should grow 3.6 percent, with crude oil prices likely to fall to an average of $45 per barrel, down 12 percent from this year.
  

"If the IMF numbers are not met and worldwide growth numbers hover around 3.1 percent, South Korea's GDP may only be able to grow in the mid-2 percent range," it said.
  

Additional risks, like weaker-than-expected growth in China and fallout from U.S. rate hikes, could pour cold water on the global economy and South Korea, the KDI added.
  

China is Seoul's No. 1 export market, so a downturn in the neighboring country will invariably hurt the country. A U.S. rate cut could force the country's central bank to mark up its own interest rates to prevent capital outflow, having a negative impact on the South Korean economy as a whole.
  

The think tank said that there is a pressing need to control the spike in household debt that could reach as high as 1,200 trillion won ($1.01 trillion) by year's end by lowering the debt-to-income ratio of loans and compelling people to pay back the principal of their loans.
  

"The DTI ratio needs to come down from the current 60 percent which is higher than those offered by other countries," it said.
  

The KDI then said that with inflationary pressure not likely to pose immediate problems, it is advisable for Seoul to maintain its low interest rate policies that can contribute to growth.
 
 
On fiscal policy measures, it said the government needs to improve the country's income-expenditure balance sheet by cutting back on waste and increasing the tax base. (Yonhap)