BOK slashes its 2017 growth forecast to 2.8%

The Bank of Korea (BOK) shaved its 2017 growth forecast to 2.8 percent from 2.9 percent while holding this year’s at 2.7 percent. It also froze the benchmark interest rate during a monetary policy meeting on Thursday.

The central bank cited the recall of the Galaxy Note7 by Samsung Electronics as well as external uncertainties tied to the U.S. Fed’s interest rate policy and a sluggish global recovery as reasons for cutting next year’s projection.

Central bank Governor Lee Ju-yeol said even though the Galaxy Note7 sales suspension could have a negative impact on the local economy this year, it wouldn’t be a defining factor for macroeconomic indicators, including exports on a “large scale.”

“It’s been only two days since the decision was made, so we need to keep monitoring going forward,” Lee said.

The BOK’s outlook invited questions of whether the central bank was too rosy, especially since private think tanks have been lowering their growth outlook for 2017 to the mid or low 2 percent range.

LG Economic Research Institute says unfavorable economic conditions such as weak exports and sagging domestic consumption will outweigh positive developments, and it cut its 2017 outlook to 2.2 percent.

“It would be hard to find factors that would fuel the Korean economy next year,” the research institute said, “The decline in global investments will affect the country’s exports and trade regulations from the U.S., Europe and China will pose challenges to exporting companies.”

The institute also predicted that construction investment, a key to driving economic growth, will shrink next year.

The institute stressed that 2017 is the first year that the number of Korea’s primary workforce, aged 15 to 64, will start decreasing, which could sap purchasing power in Korea and general economic vitality.

Hyundai Research Institute has projections of 2.6 percent for next year and 2.5 percent for this year.

“Exports will slightly turn upward while the domestic economy will remain slow,” said Hong Joon-pyo, a researcher at Hyundai Research Institute.

Hong said that the Galaxy Note7 debacle would not damage Korea’s exports as a whole, although a minor effect is expected.

“The issue will not have a positive impact on the Korean economy for sure, but it won’t be a deciding factor that turns exports upside down,” Hong said.

The BOK said smartphones account for 5.4 percent of Korea’s exports, though it declined to reveal the share of Samsung Electronics’ products.

In response to critical views, Governor Lee said that the BOK takes into account both upside factors and downside risks.

“There are a few upside factors next year, including a rise in commodity prices and improved trade in emerging countries,” he said. He noted that uncertainties surrounding possible rate hikes in the U.S. and the fallout from Britain’s decision to leave the European Union remain primary risks for the Korean economy.

Meanwhile the central bank kept the benchmark interest rate unchanged at 1.25 percent on grounds of rapidly rising household debt. The rate has been kept at the same level for the last four months since the BOK shaved off 0.25 percentage points from 1.5 percent in June. The Bank of Korea chief came under fire last week for his failure to reign in snowballing debt levels that have set records one month after another.

Household debt in September reached 688.4 trillion won ($606.27 billion), the second-highest September monthly increase.

BY PARK EUN-JEE [park.eunjee@joongang.co.kr]