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UPDATE 2-S.Korea slashes 2017 GDP forecast, makes plans to shore up consumption
December 28, 2016 / 11:47 PM / a year ago

UPDATE 2-S.Korea slashes 2017 GDP forecast, makes plans to shore up consumption

* S.Korea sees 2017 growth at 2.6 pct vs 3.0 pct earlier

* S.Korea finance ministry sees recovery momentum declining

* Political scandal poses risks to fragile sentiment

* Nov industrial output jump likely temporary

* For related table, please see (Adds PM comments, BOK report, replaces analyst comment)

By Christine Kim and Cynthia Kim

SEJONG, South Korea, Dec 29 (Reuters) - South Korea lowered its growth outlook for next year on Thursday as it saw weaker domestic demand and waning job growth holding back recovery in Asia’s fourth-largest economy.

Corporate restructuring in the troubled shipping and shipbuilding sectors would hobble job growth next year, while consumption was expected to slow due to uncertainties inside and outside the country.

An ongoing influence-peddling scandal involving President Park Geun-hye and her close acquaintance, Choi Soon-sil, has seen lawmakers overwhelmingly vote for Park’s impeachment, which the Constitutional Court must soon decide whether to uphold.

The scandal and subsequent investigations have battered consumer and business confidence, with the consumer confidence falling to a 7-1/2 year low earlier this week.

As a result, the government now sees economic growth of 2.6 percent in 2017, down from its earlier estimate of 3 percent, and below the Bank of Korea’s 2.8 percent forecast, the finance ministry said.

“It’s a relatively bleak view given that the government usually takes in the upside of policy efforts to boost growth,” said Moon Jung-hui, an economist at KB Investment & Securities.

“While exports are likely to rebound next year, sluggish domestic demand will drag down overall growth as the construction industry is losing steam.”

Earlier on Thursday, Prime Minister Hwang Kyo-ahn stressed the importance of restoring stable conditions so households and businesses could go back to their normal spending patterns.

In its policy direction for 2017, the BOK also said the economy faces downside risks from political uncertainty, adding that it plans to keep monetary conditions easy next year.

FISCAL SPENDING TO THE RESCUE

The declining trend in exports, however, may have bottomed out. The government projects exports will expand 2.9 percent next year. December exports, due Jan. 1, are expected to rise for a second straight month.

Despite this, possible trade protectionist policies from the U.S. and increased trade competition with Japan and China are risks to export recovery, the ministry said.

Also on Thursday, data showed industrial output in November jumped at its fastest pace in over seven years, but analysts doubted the gain would be sustained.

In a separate statement analysing November’s output, the finance ministry downplayed the rebound and said recovery momentum could decline due to factors such as faster policy tightening by the U.S. Federal Reserve in 2017.

“This is just a temporary rebound and is unlikely to be the prelude to an actual recovery,” said Lee Sang-jae, chief economist at Eugene Investment & Securities.

The finance ministry said if momentum doesn’t pick up it may press the case for a supplementary budget next year. Growth slipped to 2.6 percent in 2015 from 3.3 percent in 2014.

Finance Minister Yoo Il-ho said on Dec. 22 the government may consider drafting a supplementary budget if growth next year looks likely to slow to below 2.5 percent.

The government has pledged to spend 31 percent of fiscal expenditure by end-March 2017 to counter slowing growth. The government regularly front-loads budget spending in the first half of the year to lend the economy a boost.

The government will also increase policy financing through state-supported banks by 8 trillion won ($6.64 billion) in 2017 to 187 trillion won in total.

To shore up domestic demand, it plans to launch a promotional event for the upcoming Lunar New Year holiday in January and to develop new travel destinations and packages inside the country to attract foreign and local tourists.

The government sees inflation at 1.6 percent in 2017, up from 1 percent estimated for this year, and expects about 260,000 jobs to be added, down from 290,000 for this year. ($1 = 1,205.2000 won)

Reporting by Christine Kim and Cynthia Kim; Additional reporting by Dahee Kim; Editing by Eric Meijer

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