News Analysis: MERS-hit S. Korean economy to recover in H2 on fiscal, monetary stimulus

South Korea's economy, hit hard in the first half by the unexpected outbreak of Middle East Respiratory Syndrome (MERS), was forecast to get back on a modest recovery track in the second half thanks to fiscal and monetary stimulus packages.

Bank of Korea (BOK) lowered its 2015 growth forecast for the economy from 3.1 percent to 2.8 percent Thursday, after revising it down by 0.3 percentage points in April and by 0.5 percentage points in January respectively.

The downward revision came as the MERS fears prompted consumers to shun public places crowded with people and to refrain from even going for shopping. The deadly virus has infected 186 South Koreans, among whom 35 died, since the first case was identified on May 20.

The second-quarter economic growth was estimated at 0.4 percent on temporary shocks from the MERS outbreak, BOK Governor Lee Ju- yeol told reporters. It was lower than an earlier estimate of 1.0 percent on a quarterly basis.

Reflecting a negative economic effect of the respiratory illness, the finance ministry cut its outlook to 3.1 percent. Figures from key domestic think tanks were recently downgraded, ranging from 2.7 percent to 2.9 percent.

"The spread of the illness is dampening consumer confidence amid already weak domestic demand," Tom Byrne, senior vice president at Moody's in Singapore, said in a June 18 report. Consumer sentiment tumbled six points in June, falling below the neutral 100 level for the first time since September 2012.

Tourism industry hit a snag after the outbreak, dragging down the already-subdued domestic demand. According to the Korea Tourism Organization, at least 130,000 foreign tourists cancelled their travel to South Korea in June because of the MERS fears.

From the second half, the economy was forecast to recover modestly as the MERS crisis showed signs of abating. In the past 12 days, only four new cases of MERS infection were reported. The government may declare an end to the MERS crisis no later than end- July.

"Recently announced fiscal stimulus and lower rates should help bolster economic growth from late 2015," Emily Dabbs, a Sydney- based economist at Moody's Analytics, said in a July 2 report. Nomura International forecast that the supplementary budget plan can fully offset the negative effect of the MERS outbreak.

To counter the negative MERS effect, the finance ministry announced 11.8 trillion won (10.4 billion U.S. dollars) of extra budget plan together with some 10 trillion won of other stimulus measures.

"If the supplementary budget is confirmed as planned and implemented in a timely manner, it will raise the growth rate by 0. 3 percentage points," said the BOK head.

To address the MERS crisis, the central bank cut its benchmark interest rate by a quarter percentage point in June to a historic low of 1.5 percent. The bank lowered the rate in March for the first time after cutting it by 25 basis points in August and October last year respectively.

Outlook for exports, which account for about half of the South Korean economy, remained dismal due to external uncertainties like a possible Greek exit from the euro, an expected rate hike in the United States.

"We do not expect a supplementary budget to offset weaker exports, which will have larger and more prolonged negative effect on the Korean economy than the MERS outbreak," said Kwon Young Sun, an economist at Nomura in Hong Kong.

Exports fell 1.8 percent in June from a year earlier after plunging 10.9 percent in the previous month. The pace of export fall slowed, but it kept a downward trend for six straight months.

For the first six months of this year, the exports declined 5 percent compared with the same period of last year. Endi