Roundup: BOK cuts 2015 growth outlook to 2.8 pct on MERS shock

The Bank of Korea (BOK), South Korea' s central bank, cut its 2015 growth forecast Thursday as sluggish exports and weak private consumption, caused by the outbreak of Middle East Respiratory Syndrome (MERS), dampened the Asia's fourth-largest economy.

The BOK forecast was revised down to 2.8 percent from 3.1 percent estimated three months earlier. The bank cut its 2015 outlook by 0.3 percentage points to 3.1 percent in April, after lowering it by 0.5 percentage points to 3.4 percent in January. "The second-quarter economic growth is estimated at 0.4 percent on temporary shock from the MERS outbreak," BOK Governor Lee Ju-yeol told a press conference after deciding to keep the benchmark interest rate on hold at an all-time low of 1.5 percent. The bank lowered the policy rate in June by a quarter percentage point.

The BOK's second-quarter growth outlook was initially set at 1. 0 percent on a quarterly basis, but the MERS shock prompted the bank's gloomier view. The MERS corona virus has infected 186 people, among whom 35 died, since the first case was reported on May 20.

Private consumption shrank sharply in June, but it showed some signs of recovery in the fourth week of June and the first week of July, Lee said. Since the MERS outbreak, consumers refrained from visiting public venues crowed with people and even shunned going for shopping.

In June when MERS fears reached a peak, sales in department stores and discount chains shrank 10.7 percent and 9.7 percent each compared with the same month of last year. Sales of gasoline and diesel reduced 2.9 percent.

To counter the negative economic effect, the finance ministry announced 11.8 trillion won (10.4 billion U.S. dollars) of supplementary budget plan together with about 10 trillion won of other stimulus measures. "If the extra budget is confirmed as planned and implemented in a timely manner, it would raise the growth rate by 0.3 percentage points as the government has expected," said Lee.

The BOK's 2.8-percent growth outlook was lower than the finance ministry's recent forecast of 3.1 percent. The International Monetary Fund revised down its outlook for the economy by 0.4 percentage points to 3.3 percent, and the state-run Korea Development Institute (KDI) lowered it by 0.5 percentage points to 3.0 percent.

Major economic research institutes recently offered its revised growth outlook for 2015, ranging from 2.7 percent to 2.9 percent.

Outlook for 2015 consumer price inflation was unchanged at 0.9 percent compared with three months earlier. The long spell of drought was expected to prop up farm goods prices in the second half, but it may have little effect on the bank's previous forecast.

Consumer prices gained 0.7 percent in June from a year earlier. The headline inflation was up from 0.5 percent in May, but it stayed at the zero-percent level for seven straight months and below the BOK's inflation target of 2.5-3.5 percent for almost three years.

The BOK expected the headline inflation to rise from 0.5 percent in the first half to 1.2 percent in the second half. The bank said the dry weather effect would raise the inflation by 0.1 percentage point.

Outlook for private consumption was downgraded from 2.3 percent to 1.8 percent in 2015. The private spending was forecast to grow 1.7 percent in the first half and 2.0 percent in the second half respectively.

The BOK said in a statement that consumers would spend more in the second half amidst the weakening MERS effect. Recovery in housing market and personal income would bolster consumption, but large household debts and rising resident costs caused by higher home prices would negatively affect the consumption, the bank said.

Facility investment was forecast to increase 5.4 percent in 2015 before rising 5.6 percent in 2016.

Exports and imports were expected to grow 1.5 percent and 1.7 percent each due to rebound in the second half.

Outlook for 2015 current account surplus, the broadest measure of cross-border capital flow, was set at 98 billion U.S. dollars, higher than an earlier estimate of 96 billion dollars thanks to faster decline in imports than exports. Endi