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Economy

Seoul cuts growth forecast to 2.6% amid political turbulence

Sluggish domestic demand, uncertainty abroad, ageing population add to woes

SEOUL -- The South Korean government cut the country's 2017 growth forecast to 2.6% due to sluggish demand at home and increasing uncertainty abroad, painting a gloomier picture than its previous estimate of a 3.0% expansion.

The Ministry of Strategy and Finance said on Thursday that the South Korean economy may rebound in the first half of 2017, thanks to the government's early implementation of a fiscal budget. However, the ministry forecast that Asia's fourth-largest economy may lose its momentum later in the year, hit by low private consumption and the side effects of tough corporate restructuring.

The country has been embroiled in a political scandal, with President Park Geun-hye impeached by parliament earlier this month after it was revealed that she allowed her longtime friend Choi Soon-sil to influence her decision-making. Park was suspended from her job while preparing for her trial at the Constitutional Court.

But, analysts say that the government's forecast is still optimistic. Nomura expects the country's gross domestic product to expand by just 2.0% next year.

"We expect Korea's GDP growth to underperform global GDP growth, due to weak exports," said Kwon Young-sun, an economist at the Japanese investment bank. "Construction investment, the main growth driver of 2016, will also weaken."

South Korea also faces structural problems. The finance ministry said rising household debt and the ageing population could drag on private consumption, as people save for the future.

"Households will be under more pressure to pay back their debt for some time while the ageing society will add burden on the economy by putting the brakes on consumption," said the ministry in a statement. South Korea's household debt topped 1,296 trillion won ($1.07 trillion) in the third quarter, up from 1,203 trillion won in December 2015, according to the ministry.

The population aged 65 and above reached 6.5 million last year, accounting for 12.8% of the total, said the welfare ministry, quoting data from Statistics Korea. The ministry expects the ratio to reach 14.3% in 2018.

To help alleviate these problems, the government says it will give tax credits worth 1 million won for newly-weds from 2017 as part of its strategy to boost birth rates. Newly married couples will also get cheaper home loans.

South Korea's birth rate is estimated to be 1.17 per woman this year, the lowest since 2005 when it only reached 1.08, according to a report by the welfare ministry. The number of newborn babies is also expected to be 406,000 in 2016, the lowest level since 1960s.

The government has set up a five-year plan to support its elderly, offering free counseling services and jobs.

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