Bank of Korea to sharply lower 2020 GDP forecast: governor

The South Korean economy is expected to shrink at a steeper rate than the expected 0.2% this year, and the Bank of Korea (BOK) will sharply revise down its growth forecast, BOK Governor Lee Ju-yeol said on August 24.

During a Q&A session of the parliament's finance committee meeting, an opposition lawmaker asked the governor if he expects the economy to contract more than 1% this year. "We cannot rule out the possibility," said Lee.

“The resurgence in COVID-19 will have a negative impact on consumption. (The BOK) will sharply lower the forecast for this year’s economic growth from the previous 0.2% contraction.”

His remarks came ahead of the central bank’s official revisions to the country’s economic growth forecast due on August 27.

In July, Lee said Asia's fourth-largest economy would undershoot the central bank’s May projection of a 0.2% contraction this year, citing double-digit declines in exports in May and June. At the time, the Bank of Korea saw a 1.4% year-on-year contraction in private consumption for this year.

In comparison, the International Monetary Fund in June revised its forecast for South Korean economic growth to negative 2.1%, versus its previous projection of a 1.2% contraction.

Earlier this month, the Organisation for Economic Co-operation and Development forecast the South Korean economy to shrink by a milder-than-expected 0.8% this year. But it added that a second global wave of coronavirus infections would deepen this year’s economic contraction to 2%.

In the first half of this year, South Korea’s gross domestic product contracted by 0.8% year on year. The second quarter's 3.3% contraction marked the country’s worst quarterly decline in 22 years.

NO RATE MOVE FOR PROPERTY MARKET

Given the weaker-than-expected economy, the Bank of Korea will maintain an accommodating monetary stance, the governor said. But he signaled no plan to use monetary policy to cool the residential property market.

The Bank of Korea left its policy rate unchanged in July for the second consecutive month, after slashing the base rate by a combined 75 basis points since the start of this year. It cut the interest rate by 50 basis points in March and another 25 basis points in May.

Governor Lee noted that the positive effects of the monetary easing steps implemented this year outweighed the negative effects, such as the surge in asset prices, adding that the overheating residential property market was attributable not only to surging market liquidity but to various other factors.

South Korea’s money supply grew at a quicker pace in June than it has in a decade, and household debt surged to a record high of 1,637.3 trillion won at the end of June.

Regarding the stock markets' bull run, he said domestic stock markets have been moving irrelevantly to the real economy, and cautioned about a possible correction in stock prices. The benchmark KOSPI has leapt more than 60% from a March low and has gained nearly 8% year to date.

Write to Ikhwan Kim at lovepen@hankyung.com