South Korea cuts growth views as trade war batters exports

South Korea cuts growth views as trade war batters exports
FILE PHOTO: Two large container ships and a tanker can be seen under construction in a ship yard close to Busan, South Korea October 25, 2017. REUTERS/Henning Gloystein -
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Henning Gloystein(Reuters)
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By Joori Roh and Choonsik Yoo

SEJONG, South Korea (Reuters) – South Korea on Wednesday cut this year’s economic growth target to what would be a seven-year low as the prolonged U.S.-China tariff war hit global demand for the export powerhouse’s manufactured goods.

The worsening global outlook has prompted the government to slash its projections for exports for Asia’s fourth largest economy in a sign policymakers will likely need to do more to prop up slumping activity.

The government now aims to achieve growth of between 2.4% and 2.5% this year, slower than the 2.6% to 2.7% range projected in its previous forecast in December, the finance ministry said in a scheduled mid-year update of its economic forecasts.

“The government will do its best to strengthen the readiness for our economy to make a strong recovery when the global economy reaches the point of up-turn,” Finance Minister Hong Nam-ki told a news conference, emphasising that the current slowing was mainly due to weaker global growth.

Bond prices rose and the won <KRW=> fell in early trade as investors saw the downgrade of economic views supporting the case for a central bank interest rate cut as early as this month.

The three-year treasury bond futures <KTBc1> rose 0.13 points after the first hour’s trade while the won <KRW=KFTC> was down 0.3% against the dollar.

In a dramatic change of its views, the government now expects exports to shrink 5% for the whole of this year, giving up an earlier projection for 3.1% growth.

The ministry also lowered forecasts on most other major indicators including private consumption, capital investment and construction spending.

“We’ve lowered the forecast as uncertainties over the trade war remain high amid the slowing global economy, while a recovery in the semiconductor sector that accounts for 20% of total exports is being delayed,” Lee Eog-won, director-general of the ministry’s economic policy bureau, told a briefing.

South Korea’s economy grew 2.7% in 2018 and the new growth target would be the slowest since a 2.4% expansion in 2012. The government’s revised growth forecast is, however, still more optimistic than those of most global investment banks, which were as low as 1.4% in some cases.

The central bank previously cut its growth forecast for this year in April to 2.5% from 2.6%, and is due to revise the projection again on July 18, when the Bank of Korea could cut interest rates.

While lowering the growth target, the finance ministry stopped short of drafting a massive extra spending programme as a 6.7 trillion won (4.5 billion pounds) spending plan is pending parliamentary approval.

Weakening global demand due to prolonged U.S.-China trade frictions hit South Korea’s economy especially hard as exports, the main engine of growth, have fallen in each of the past seven months.

The finance ministry sharply lowered its forecast for this year’s inflation to 0.9% from the previous 1.6%, compared with the central bank’s target set at 2% and underscoring a stronger case for the BOK to reduce interest rates.

(Reporting by Joori Roh and Choonsik Yoo; Editing by Sam Holmes)

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