Forecast Reduction
The Korea Institute of Finance (KIF) projected the nation’s economy to grow at only 2 percent this year for the first time among the local major economic research institutes. The factors for the lower growth rate prediction came from both home and abroad – slower domestic demand and sluggish exports.
The KIF said on June 17 that the Korean economy would reach only 2.8 percent growth this year, down 0.9 percent from its earlier forecast of 3.7 percent, citing the economy suffering from a slump in exports and a sharp shrink of consumption owing to the unexpected outbreak of Middle East Respiratory Syndrome (MERS).
The KIF projected private spending to slightly increase to 2 percent from 1.8 percent last year, backed by the recovery of consumer sentiment thanks to some gains in the local stock and property markets.
The think tank, however, pointed out that growth will be strained by structural factors such as decreasing spending due to growing household debt, as well as temporary factors like the MERS outbreak.
The KIF said that the MERS outbreak is likely to shave off gross domestic product growth by 0.1 percentage points due to a fall in spending in the service and retail sectors.
Exports were forecast to grow 2.3 percent, down from a 2.8 percent increase in 2014, as unfavorable currency circumstances and weakening growth in China offset some economic recovery in advanced economies.
Such sluggish domestic consumption and exports will also drive the facility investment growth rate to fall to 4.4 percent from last year's 5.8 percent, according to the think tank.
The KIF’s growth rate revision is the latest in a series of economic forecast downgrades by economic institutes both at home and abroad. The Korea Development Institute cut the forecast to 3 percent from 3.5 percent, and the International Monetary Fund lowered the growth rate to 3.3 percent from 3.7 percent.
The finance ministry and the central bank, which are both slated to release their revised economic forecast in the coming weeks, are also expected to lower their previous forecasts, taking into consideration the impact of MERS on the economy.
Under the circumstances, Shin Sung-hwan, president of the KIF, stressed on that day that the nation should not rule out room for additional basic rate cuts.