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Economy

Bank of Korea cuts economic growth forecast on MERS

SEOUL -- The Bank of Korea on Thursday revised downward the economic growth projection for this year to 2.8% from 3.1%, citing the damage by Middle East respiratory syndrome and dry weather to an economy already hurt by China's slowdown.

     "With exports already sluggish, the impact of MERS and drought will bring down April-June growth to around 0.4%, significantly lower than an earlier projection," Bank of Korea Gov. Lee Ju-yeol told reporters. The annual growth rate last fell below 3% in 2013.

     MERS will likely shave 0.2 to 0.3 percentage point off annual growth while the export slump will dent it by 0.1 point and drought by 0.1 point, the bank said.

     An interest rate cut in June and a government stimulus package totaling 22 trillion won ($19.4 billion) can lift the economy by 0.3 point, , but still not enough to maintain the 3.1% forecast made in April. The latest projection is below the potential growth rate, which is said to be in the mid-3% range.

     Foreign tourists canceled trips in droves during the April-June quarter due to South Korea's MERS outbreak. At the peak of the epidemic, locals also refrained from going out, chilling consumption.

     Below-average rainfall nationally likely will cut harvests, possibly lifting produce prices. Household spending is projected to rise only 1.8%, down 0.5 point from a forecast in April.

     Exports remain listless due to China's slowdown and the won's appreciation against the yen. But a weak domestic market also is likely to slow imports, lifting the nation's account surplus to $98 billion, up $2 billion from the April forecast. Foreign currencies earned on exports are not flowing into investment, boosting the account surplus despite a depressed economy, which in turn is keeping the won strong.

     A government stimulus package unveiled Thursday includes 16.2 trillion won in trade financing to support small and midsized companies through 2016. The package also targets organic light-emitting diodes and other growth fields. The government will work with Lotte and other major distributors to develop internationally competitive products to boost exports of cosmetics and other goods.

     But some say many of the stimulus measures are unlikely to bring an instant economic boost, and it is uncertain whether the government will succeed in propping up sagging exports.

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