Bloomberg News

S. Korea Trims Growth Forecast on Europe Woes

April 16, 2012

The Bank of Korea headquarters stands in Seoul, South Korea. Photographer: Jean Chung/Bloomberg

The Bank of Korea headquarters stands in Seoul, South Korea. Photographer: Jean Chung/Bloomberg

The Bank of Korea lowered its economic growth forecast for this year as rising bond yields in Spain highlight the threat to Asian exports from Europe’s debt crisis and austerity measures.

Gross domestic product will expand 3.5 percent, less than the 3.7 percent estimate in December, the central bank said today in a statement.

Korea’s monetary authority sees a 0.3 percent contraction in the euro region’s economy this year that will slow world trade growth even as elevated oil prices contribute to inflation risks. India may cut benchmark interest rates for the first time in three years as Asia’s second-largest economy slows, a Bloomberg News survey indicates before the central bank’s policy board meets tomorrow.

“In terms of the upside and downside risks to the growth path, the downside predominates, including the euro area sovereign-debt crisis and the sharp run-up in oil prices owing to geopolitical risks,” the central bank said.

Asian stocks fell the most in a week, the euro weakened and commodities dropped as Spain prepared to auction bonds. The yuan declined as China doubled the currency’s trading band against the dollar. The MSCI Asia Pacific Index dropped 0.9 percent as of 12:20 p.m. in Tokyo.

“If Spain’s yields continue to rise, then they’re going to get to a point where they may well need some form of assistance, as Greece did,” said Imre Speizer, a strategist in Auckland at Westpac Banking Corp. (WBC)

India’s Inflation

India may report today that inflation slowed to 6.65 percent in March from 6.95 percent in February, according to the wholesale price index that serves as a benchmark gauge, a Bloomberg survey of analysts indicates. Rising wages, weakness in the rupee and elevated oil costs will put a floor under inflation in coming months, Moody’s Analytics said today.

Elsewhere, trade balance figures are due today from Italy and the euro region, while the U.S. may report that retail sales grew at a slower pace.

A 0.3 percent rise in retail purchases in the world’s biggest economy in March would follow a 1.1 percent increase in February that was the biggest in five months, according to the median forecast of 71 economists surveyed by Bloomberg News ahead of Commerce Department figures.

South Korea kept borrowing costs unchanged for a 10th straight month last week as North Korea launched a rocket. The central bank said last week that the economy has shown signs of a moderate recovery, with consumption and construction investment increasing.

Faster Growth

“The Korean economy will post a growth rate of around 1 percent in the first half of 2012, pulling out of its sluggish 0.3 percent growth during the fourth quarter of last year,” the central bank said. “From the latter half, economic activity is expected to show an uptrend, albeit modest, with the growth rate picking up to the low 1 percent range.”

Consumer prices are expected to rise 3.2 percent this year, less than an earlier forecast of a 3.3 percent gain. Core prices, excluding oil and agricultural products, may rise 2.6 percent this year and 3.2 percent next year, the central bank said.

Next year, economic growth will likely accelerate to 4.2 percent while inflation will slow to 3.1 percent, the BOK said.

“The growth forecast revision was modest, suggesting that the central bank will stand pat for an extended period of time,” said Lee Sang Jae, a senior economist at Hyundai Securities Co. in Seoul. “Given the view that the economy will be better in the second half, they will not likely cut interest rates, while moderating inflation calls for no urgent need of a rate hike.”

Trade, Jobs

The current-account surplus is expected to narrow to $12.5 billion in 2013 from an estimated $14.5 billion this year, the Bank of Korea said. It also projected 350,000 jobs will be created in 2012 and 320,000 jobs next year, with an unemployment rate at 3.3 percent each year.

Consumer prices rose 2.6 percent in March from a year earlier, the slowest pace in 20 months. Subsidies for child care and an expanded free school lunch program cut price gains by 0.5 percentage point, with a similar effect to last until February, according to Ahn Hyung Jun, a director at Statistics Korea.

“Higher-than-expected oil prices will likely offset the impact of an expanded social welfare program on consumer inflation,” Shin Woon, director-general of the research department at the Bank of Korea, told reporters in Seoul today. “Inflation pressures remain in place as the childcare and school lunch fees are to be paid by the government.”

Governor Kim Choong Soo and his board held the benchmark seven-day repurchase rate at 3.25 percent last week. The unanimous rate decision was predicted by all 13 economists surveyed by Bloomberg News.

“The BOK governor’s comments at the April 13 press conference were moderately more hawkish, in our view, highlighting its endeavors to lower inflation expectations,” Kwon Goohoon, an economist at Goldman Sachs Group Inc. (GS:US) in Seoul, said in a note on April 13. “We do not expect the normalization stance to be changed.”

To contact the reporter on this story: Eunkyung Seo in Seoul at eseo3@bloomberg.net

To contact the editor responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net


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