South Korea's central bank lowers growth outlook on Brexit

SEOUL, South Korea – South Korea’s central bank lowered its growth outlook on Asia’s fourth-largest economy on Thursday, citing Britain’s decision to leave the European Union.

South Korea’s economy will likely expand 2.7 per cent this year, compared with its April prediction of 2.8 per cent, Bank of Korea said. Next year, it will eke out 2.9 per cent growth.

The downward revision follows the Finance Ministry’s outlook cut last month. It confirms worries that South Korea’s once dynamic economy will go through a period of slow growth.

The bank blamed a drag in the global economic recovery due to increased uncertainties caused by Britain’s decision to leave the EU.

South Korea’s export to Britain is not significant but the referendum outcome dented investor sentiment. Encouraging companies to spend more was a key challenge for policymakers during the first half of this year, but South Korean companies were reluctant to make big investments because of weak global demand, oversupplies in some industries and dim outlook in the global economy. Companies are expected to sharply cut their capital investment for the rest of the year as Britain’s EU departure and restructuring at local shipbuilders created more uncertainties.

The outlook for household income conditions is also not optimistic, though the bank noted that growth in construction investment was one bright spot. Spending on constructing buildings was expected to strengthen thanks to gains in new residential buildings.

Also on Thursday, Bank of Korea policymakers left the policy rate at a record low of 1.25 per cent, after lowering the rate last month. The rate cut came shortly after South Korea’s finance ministry introduced stimulus measures to cushion the impact on job markets as efforts to restructure loss-making shipbuilding companies would lead to a surge in unemployment rates.

The consumer price index will likely see a soft growth at about 1 per cent this year, according to Bank of Korea, much lower than its inflation target of 2 per cent. Some economists believe that the policymakers would cut the key rate once again this year amid a low inflationary pressure and weak corporate sentiment.