In light of the trade conflict with Japan and other external risks, concerns are mounting that South Korea’s economic growth this year may fall below 2 percent at worst, lower than the range of 2.2-2.5 percent forecast by the government and the central bank.

The state-run think tank Korea Institute for International Economic Policy said in its recent report that Japan’s export restrictions would reduce Korea’s gross domestic product by 0.27-0.44 percentage point.
 

The report was published Thursday, a day prior to Tokyo’s decision to remove Seoul from its list of preferred trade partners, and therefore referred only to export curbs imposed in early July on three key materials crucial for semiconductor and display businesses.

“It is difficult to estimate the regulatory categories (of the imminent whitelist removal) and the impact it may have on the Korean economy and the global economy,” the report said.

Considering aggravated relations between Japan and Korea, the actual GDP for this year may face a steeper decline, market experts noted.

Local brokerages Eugene Investment & Securities and Hana Financial Investment said last week that trade friction with Tokyo could bring down Seoul’s growth rate by 0.6 percentage point and 0.8 percentage point, respectively. If these pessimistic outlooks turn out to be true, Korea’s on-year GDP growth would fall under the 2 percent mark.

The Ministry of Economy and Finance in early July lowered its outlook for the country’s growth rate to the 2.4-2.5 percent range, down 0.2 percentage point from its earlier suggestion. The Bank of Korea also cut its outlook to 2.2 percent, down 0.3 percent from its April figure.

Despite the adjustments, speculations have been rampant that Seoul’s economy may not even achieve these modest target figures this year, due to external risks, ranging from US-China trade tension to the struggling semiconductor industry and the Korea-Japan economic war.

As of last month, at least 10 global market observers predicted that Korea’s GDP growth would linger in the 1 percent range this year, which would mark the lowest on-year GDP growth since the 0.8 percent observed in 2009. Of them, the Bank of America Merrill Lynch suggested 1.9 percent.

“Though there are various uncertainties, it is indisputable that the 2.2 percent forecast suggested by the BOK is facing considerable threat,” said Yoon Yeo-sam, an analyst at Meritz Securities.

“Should the current Korea-Japan problem expand at any time, the growth rate will drop, possibly around the 2 percent mark or lower.”

Eugene Investment & Securities analyst Shin Dong-soo also said GDP growth is likely to be “around 2 percent at best” this year.

Though refraining from jumping to conclusions, the central bank has left room for additional monetary easing measures and prospect amendments later this year.

“If the economic conditions worsen, (a rate cut) will of course have to be considered,” BOK Gov. Lee Ju-yeol told reporters on Thursday, after the US Federal Reserve’s announcement of a policy rate cut.

The monetary chief’s remark was seen as a shift from his previously prudent stance, boosting speculations that GDP outlook may also be revised down.

Seoul’s central bank is due to announce its revised economic outlooks in November.

By Bae Hyun-jung (tellme@heraldcorp.com)