Fitch slashes Korea’s 2019 growth outlook from 2.5% to 2.0%

2019.06.19 09:40:44 | 2019.06.19 09:50:19

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Fitch Ratings Inc. has revised down South Korea’s economic growth outlook for this year by 0.5 percentage point to 2.0 percent, joining the rest global credit rating agencies in turning more pessimistic about the country’s economy due to the country’s weaker-than-expected growth momentum.

In its global economic outlook report released on Tuesday (local time), Fitch slashed its forecast for Korea’s gross domestic product (GDP) growth for 2019 from its previous forecast of 2.5 percent in January to 2.0 percent.

“With underlying momentum much weaker than we had envisaged, we have cut our 2019 GDP growth forecast substantially,” the agency said in the global economic outlook report.

Fitch said Korea’s 0.4 percent on-quarter contraction in GDP in the first quarter this year was an unexpected fall, largely led by the constant fall in exports, the country’s key growth driver, since the second half of last year.

The Bank of Korea data showed earlier this month that Korea’s economy shrank 0.4 percent in January-March from the previous quarter, the biggest fall since the global financial crisis in 2008. Korea’s exports decreased 9.4 percent in May from a year earlier, according to the Ministry of Trade, Industry and Energy, backtracking for a sixth straight month. Exports were dragged down by a 30.5 percent plunge in semiconductor shipments.

With the revision, Fitch has become the latest in turning more pessimistic about Korea’s economic growth outlook. Last month, the Organization for Economic Cooperation and Development slashed its 2019 growth outlook for the Korean economy from 2.6 percent to 2.4 percent, citing a decrease in fixed investment following restructuring in the manufacturing sector, and slowdown in job creation. Moody’s Investors Service also cut its growth estimate for Korea this year from 2.3 percent to 2.1 percent, and Standard & Poor’s from 2.5 percent to 2.4 percent.

While the Korean government maintains its outlook of 2.6 percent to 2.7 percent growth this year, the BOK recently suggested it may cut its estimate from the current 2.5 percent.

Last week, BOK Governor Lee Ju-yeol projected bigger-than-expected damage on the economy from the U.S.-China trade frictions and a lengthier downturn of the semiconductor industry, Korea’s mainstay export item, reversing from his earlier prediction of an upturn in the chip industry in the latter half of this year. With his grimmer projection, Lee hinted at a possible rate cut. The BOK will announce its new estimate at the next rate-setting meeting on July 18.

Fitch also anticipated that muted inflationary pressure and slowing down of economy will lead the BOK to cut rates soon but conditions will reverse in 2020. It forecast the central bank will cut rates by 25 basis points to 1.5 percent this year, but return it to 1.75 percent in 2020 and further hike to 2 percent in 2021.

Fitch expected Korea’s economic growth “should recover from the second half of the year, helped by the rollout of new fiscal measures to spur domestic demand and support job creation.” On the external front, the agency projected trade war will no further escalate, and the U.S. dollar will turn weaker.

“This should help sentiment and support global value chains, in which Korean manufacturers are highly integrated,” it said.

Fitch expected Korea’s economic growth to pick up pace to 2.6 percent in 2020 and 2021.​

By Chung Seok-hwan and Lee Eun-joo

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