Although Governor Lee Ju-yeol suggested South Korea’s economy was likely in the process of bottoming, the Bank of Korea slashed their GDP and CPI forecasts on Friday, after keeping rates on hold, as expected.
GDP growth will be 2.0% this year and 2.3% next, the bank said. In July, the BOK saw growth of 2.2% in 2019 and 2.5% in 2020. This year’s CPI forecast was cut to 0.4% from 0.7%, while the bank sees consumer prices rising 1% in 2020, versus 1.3% previously.
The BOK, like the RBA, RBNZ and, assuming it makes sense to talk about US monetary policy in the same breath, the Fed, is on hold after cutting rates multiple times in 2019. The hope is that things will stabilize, obviating the need for additional accommodation.
The BoK cut rates for the second time in 2019 last month. Shortly thereafter, Governor Lee told reporters in Washington that the Sino-US trade war has trimmed South Korea’s 2019 growth by 0.4ppt. The economy is set to expand at the slowest pace since the crisis this year.
As a reminder, South Korea is facing deflation for the first time ever. CPI flatlined in August, and a pushed below zero in September, something the BoK flagged ahead of time, but which was nevertheless disconcerting.
Exports are on track for a 12th consecutive monthly decline. The country is a global demand bellwether, and the last six months have been rough, to say the least.
Other regional “canaries” (if you will) are similarly beset. Hong Kong has seen shipments fall for a dozen straight months, while Singapore’s non-oil exports fell for an eighth consecutive month in October.
As for South Korea, the BOK still has some room to ease further. Indeed, one board member dissented on Friday, calling for another cut. The country hasn’t ruled out unconventional easing in a pinch.
Most economists still see another cut in the cards for the BOK. After all, the economy is growing well below potential and inflation is (literally) non-existent.
Just call it another casualty of the trade war and, to the extent the spat between Seoul and Tokyo is weighing, another negative economic side effect of resurgent nationalism.