Bank of Korea GDP estimate grows to 2.8%

Bank of Korea Governor Kim Choong-soo waits for the start of the central bank’s monthly monetary committee meeting yesterday at headquarters in central Seoul. [NEWSIS]

The Korean central bank has raised its outlook for growth this year from 2.6 percent to 2.8 percent, citing the effect of the joint effort by the government and bank to boost the economy.

The Bank of Korea (BOK) yesterday also revised upward its projection for next year, from 3.8 percent to 4 percent.

However, there are doubts about whether Korea can reach that level due to external factors like the weakening Japanese yen and slowing Chinese economy.

The central bank’s revision is aligned with the government, which raised its outlook for this year’s expansion from 2.3 percent to 2.7 percent after the 17 trillion won ($15.1 billion) supplementary budget passed the National Assembly in May. The central bank lowered its key interest rate for the first time since October the same month.

The central bank estimated last month that with the stimulus budget and lower key rate, the nation’s GDP would see an additional 0.2 percentage point expansion this year and a 0.3 percentage point in 2014.

“The economy is growing persistently, even at a moderate rate,” BOK Governor Kim Choong-soo said yesterday after the monthly meeting of the monetary policy committee at central bank headquarters in central Seoul.

“In the first quarter, the economy grew 0.8 percent compared to the pervious quarter and the growth in the second quarter is slightly higher than in the first quarter,” Kim added. “We believe the lowering of the benchmark rate in May and the government’s supplementary budget are taking effect, while the global economy overall is recovering.”

The BOK governor said the U.S. economic recovery seems to be taking hold, and Europe’s negative growth seems to be improving since its central bank kept the benchmark rate unchanged earlier this year. Furthermore, even though the Chinese economy is slowing, it will still expand by well over 7 percent this year.

When asked if the Korean economy needs additional stimulus, the BOK answered, “It is important to closely monitor the effect of policies that are already executed and to maximize their influence.”

But the central bank and government might be too optimistic.

China’s June trade report released Wednesday showed declines in both exports and imports, adding to concerns that China’s economy may not expand as it has in the past.

China is currently Korea’s largest export market. Additionally, as the primary impact of the depreciated Japanese currency will be felt in the second half of the year, Korean exports, which have been the driving force of the economy in recent years, will likely be affected.

The domestic market also continues to struggle. With debt now reaching nearly 1,000 trillion won, consumers are likely to keep a tight rein on expenditures.

Consumer spending in the first quarter shrank 0.4 percent compared to the previous quarter, the lowest quarterly growth since the global financial crisis in late 2008.

In addition, companies are reluctant to increase investment.

The International Monetary Fund earlier this week lowered its global outlook for this year from 3.3 percent growth to 3.1 percent.

Meanwhile, the central bank held the benchmark seven-day repurchase rate at 2.5 percent for the second straight month as it gauges the results of the May cut.

“Korea’s fundamentals are recovering compared to other emerging markets,” said Lee Jae-seung, an analyst at KB Investment & Securities.

Lee predicts the central bank will leave the benchmark interest rate unchanged for the rest of the year.

By Lee Ho-jeong, Bloomberg [ojlee82@joongang.co.kr]