BOK is sanguine on growth for 2015 and 2016

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BOK is sanguine on growth for 2015 and 2016

The Bank of Korea said it expected the Korean economy to grow 3.2 percent next year. This is down 0.1 percentage point from its forecast in July, but the central bank stressed that growth would remain in the 3 percent range.

The Bank of Korea’s forecast for next year’s economy is reduced but much more optimistic than the 2.6 percent and 2.7 percent rates forecast by private think tanks Korea Economic Research Institute and LG Economic Research Institute.

The Bank of Korea has also lowered this year’s growth rate forecast to 2.7 percent from its previous 2.8 percent, again down by 0.1 percentage point.

“We made adjustments because the second quarter’s quarter-on-quarter growth rate of 0.3 percent was weaker than the 0.4 percent we had expected,” Bank of Korea Gov. Lee Ju-yeol said, explaining the rationale behind his downward revision.

Lee’s comments signify that the economy’s growth rate has not veered significantly out of the path it has anticipated since July. And that is probably why the Bank of Korea maintained the key interest rate steady at 1.5 percent on Thursday, keeping it unchanged for four straight months.

A pick-up in spending supports the Bank of Korea’s view that the economy will grow in the 3 percent range next year. Consumer spending growth, which was minus 0.4 percent and minus 3.4 percent during May and April due to the outbreak of Middle East respiratory syndrome, recovered to 2 percent and 1.9 percent in July and August.

Korea’s Black Friday event, a government-led retail sales campaign aimed at further boosting spending, has also proven somewhat effective.

According to the Ministry of Trade, Industry and Energy, department store sales from Oct. 1 to 11 rose 24.7 percent year on year, while online shopping malls saw sales jump 26.7 percent.

“The consumption tax cut and government-led efforts such as the Black Friday event have contributed to the recovery in consumer spending,” the Bank of Korea’s Lee said.

But there are doubts as to whether the pickup in consumer spending will continue into next year.

“It looks like spending has picked up, but households’ real income have not increased. The propensity to spend is weakening,” said Lee Keun-tae, an economist at the LG Economic Institute.

Analysts also say investment, a key barometer of the health of the domestic economy, is not looking very rosy either.

“There are a lot of companies that are unable to make profits. It is not a good environment for increasing corporate investment,” said Baek Woong-ki, a professor of financial economics at Sangmyung University.

Improvements in the economy next year remain a challenge.

Next year’s exports environment is also full of challenges. Exports are influenced by the global economy. The Bank of Korea forecasts exports of goods next year to increase 2.3 percent, compared with this year’s 0.2 percent.

“The International Monetary Fund expects the global economy to grow 3.6 percent next year, higher than this year’s 3.1 percent. I think the Bank of Korea has made a correct diagnosis,” said Lee Joon-hyeop, an economist at the Hyundai Research Institute.

But even with improvements in the world economy, whether they will translate into an actual increase in trade volume is another question.

“Global trade volume next year is likely to be weak due to difficulties felt by world manufacturers such as China” said Shim Sang-ryeol, a professor at Kwangwoon University.

There are views that the Bank of Korea may have been too optimistic about its outlook, and this could slow structural reforms from taking place.

“We have to admit that the Korean economy has lost steam,” said Lee at the LG Economic Research Institute. “An overemphasis on achieving 3 percent growth rate may cause other side effects and delay structural reforms.”

“We should not be emotionally swayed by the numbers, but continue with our reforms in labor markets and restructuring efforts for zombie companies,” said Kim Kyeong-su, a professor at Sungkyunkwan University.

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