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Bank of Korea cuts S. Korea's growth outlook again

Thursday - 7/12/2012, 9:58pm  ET

By YOUKYUNG LEE
AP Business Writer

SEOUL, South Korea (AP) - South Korea's central bank on Friday lowered the country's 2012 growth outlook by a wider-than-expected margin, a day after trimming its key rate to guard against fallout from Europe's fiscal crisis.

The Bank of Korea said the South Korean economy is forecast to expand 3 percent this year from a year ago, further reducing outlook from its April forecast of 3.5 percent. The central bank cited nagging debt woes in Europe hitting exports, as well as lingering household debt that is putting pressure on domestic spending in Asia's No. 4 economy.

The revised outlook will mark South Korea's slowest annual growth since 2009, when its economy grew 0.3 percent in the wake of U.S.-sparked global financial turmoil.

An outlook cut was widely expected after the central bank trimmed its key interest rate for the first time in more than three years, by a quarter of a percentage point to 3 percent, on Thursday. Kim Choong-soo, the Bank of Korea governor, said the rate cut was a pre-emptive move to buoy growth as the actual growth in the South Korean economy is feared to trail its potential for a while.

But analysts were surprised that the bank cut its outlook so steeply.

The Bank of Korea is now more pessimistic than the finance ministry, which lowered the country's outlook to 3.3 percent from 3.7 percent. The International Monetary Fund also is more optimistic than the central bank, forecasting 3.25 percent growth.

The bank's outlook would have been bleaker if the government had not decided to increase spending during the second half of this year. The central bank says that accounts for 0.2 percentage points of the estimated growth.

"Despite the stabilization in the global oil prices, the uncertainty in Europe's fiscal crisis is extending the unrest in the global financial market and is slowing growth in developed and emerging economies," Kim Jun-il, the bank's deputy governor, told reporters.

As Europe's fiscal crisis continues to dent South Korea's exports to emerging markets and developed countries, the South Korean economy will rely more on domestic private spending than on exports for the rest of the year, the central bank said.

But even the growth of private consumption will be more moderate than previously projected, the central bank said, due to household debt and a housing market slump.

The central bank also lowered South Korea's inflation outlook to 2.7 percent from 3.2 percent, as the global economic slowdown sapped demand and hence driving down commodity prices.


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