South Korea's central bank cut its 2012 economic growth forecast on Friday and warned of possible further downgrades, but economists said it may still be far too optimistic and the country will likely need both a fiscal boost and monetary easing next year.
Acknowledging the risks from Europe's debt meltdown, which are hitting exports from Asia's fourth-largest economy, the Bank of Korea cut its 2012 growth forecast to 3.7 percent from 4.6 percent, though analysts say that it failed to take sufficient account of the risk of falling domestic demand.
Its 2012 growth forecast is just 0.1 percentage point lower than its revised 2011 forecast, which was cut from an earlier 4.3 percent. The central bank sees inflation finally dropping below the central bank's 2-4 percent target range to 3.3 percent in 2012.
"Looking at the inflation, household assets, and housing costs, we expect domestic demand will be around 2.0 percent, much lower than the Bank of Korea forecast of 3.2 percent," said Park Jeong woo, an economist at SK Securities in Seoul. South Korean households have been piling on debt and that may crimp their ability to spend their way out of any downturn, economists warn.
There is plenty of room for a fiscal boost as the budget deficit is set to come in at less than 2 percent of gross domestic product (GDP) this year. That may already have started to materialise with a rapid surge in public orders for domestic machinery in October indicating a spending push, investment bank Credit Suisse said in a report this week.
On Wednesday, the government unveiled steps to boost housing market activity to help its ailing construction industry. At present, plans are to cut the deficit to 1 percent of GDP and to run a balanced budget in 2013, although calls for more welfare spending from both government and opposition may stall those plans.
But the country also faces a paralysed parliament ahead of elections due in April after the main ruling party threatened to split and as President Lee Myung-bak's mandatory single term ends as presidential polls are due in November, effectively rendering him a lame-duck. The 2012 budget bill has been stalled by parliamentary wrangling, although it is likely to be passed by the end of the year. Although the Bank of Korea warned of the risk of further downgrades to its new forecasts, it also appeared to suggest that the messy debt restructuring in the eurozone would be resolved soon.