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Economy

South Korea sees no way out as growth outlook dims this year

Central bank cuts growth estimate, citing weak chip sector and China deceleration

A container terminal in Busan. South Korean exports to China have fallen as Chinese companies ship less goods to the U.S. because of trade tensions.   © Reuters

SEOUL -- South Korea's central bank blamed a retreat in the semiconductor industry and declining trade with China as it cut the country's 2019 growth forecast by 0.1 percentage point to 2.6% on Thursday.

"External uncertainty is rising," said Bank of Korea Gov. Lee Ju-yeol, citing the Sino-American trade war and a deteriorating semiconductor market.

The 2018 growth rate of 2.7% was the weakest in six years. And the slowdown will become more pronounced this year. Exports -- 40% of gross domestic product -- are expected to expand just 3.1% in 2019 after a logging a record increase of 3.9% last year.

The biggest factor is a downturn in semiconductors, a quarter of South Korea's exports. Chip exports shrank in December as the memory market worsened. The trend is seen continuing in 2019.

South Korea has not found a growth engine for exports outside the chip industry. Although exports of machinery and petrochemical products were brisk in 2018, traditional mainstays like cars, auto parts, steel, displays, smartphones and electronics all faced a rout with no prospect of recovery this year.

The loss of economic momentum in China, the destination for 30% of its exports, is also clouding South Korea's outlook for 2019. After bilateral relations reached a low following Seoul's deployment of the Terminal High Altitude Area Defense system, South Korean exports to China enjoyed double-digit growth in 2017 and 2018. But the trade war has reduced Chinese exports to the U.S., hurting South Korean exports of intermediate goods like components and materials to China.

At the same time, Lee sees a significant downturn in the South Korean recovery as unlikely. He dismissed the possibility of a rate cut, saying "it's not time to discuss it yet."

The central bank forecasts GDP to expand 2.5% in the first half and 2.8% in the second. Although this means a downgrade for the full year, the second-half rebound is premised on a recovery in the chip market. Growth for 2020 is estimated to hold steady at 2.6%.

The correction in the semiconductor market will be temporary, and demand will increase from the second half, according to most think tanks, Lee said.

Capital investment also fell 1.7% in 2018 as investment ran its course at Samsung Electronics and SK Hynix but is expected to rise 2% this year. "The semiconductor market's recovery will improve related investment," a BOK official said.

Others view the central bank's forecast as overly optimistic. "Companies do not always carry out capital investment according to plan," an analyst said.

Most private think tanks and analysts predict growth of 2.4% to 2.5%. A local unit of Ernst & Young says 92% of 211 businesspeople at a New Year's seminar held a bleak outlook for 2019.

President Moon Jae-in is eager to stimulate the economy. He invited top economic experts and chiefs of chaebol conglomerates to speak with him on Jan. 15, promising to cut red tape.

But he said Wednesday that the government will correct wrongdoing by corporations and hold them accountable by exercising voting rights through the National Pension Service, which holds stakes in many large companies.

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