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BoK Lowers South Korea Growth Potential

BoK Lowers South Korea Growth PotentialBoK Lowers South Korea Growth Potential

Bank of Korea’s upward revision last week of its 2017 growth forecast for the economy was overshadowed by its gloomier estimate of the growth potential of Asia’s fourth-largest economy.

The central bank revised up its growth outlook for this year to 2.8% from the 2.6% estimate in April. It cited a rise in exports and facility investment, which is expected to be coupled with a gradual improvement in private consumption in the second half of the year, Yonhap reported.

In a move that probably drew more attention from analysts, the BoK lowered its projection of the country’s potential growth rate below 3% for the first time. It estimated the potential growth rate to be 2.8-2.9% for the period from 2016 to 2020. In its previous estimate in January last year, the central bank put the rate at 3.0-3.2% for 2015-2018.

The country’s current growth potential is far short of the average global potential growth rate estimated at 3.5%.

The potential growth rate is the maximum growth an economy could achieve by putting in all elements of production without prompting additional inflation. It is considered a key indicator of a country’s economic fundamentals.

According to a BoK report released last week, Korea’s potential growth rate was estimated to have continuously declined from 4.8-5.2% for 2001-2005 to 3.7-3.9% for 2006-2010 and 3.0-3.4% for 2011-2015.

The central bank attributed the country’s weakening growth potential partly to a lack of progress in boosting service industries and a reduction in productivity due to a high regulatory level.

“There are concerns that the potential growth rate may fall at a faster pace than estimated with the rapid aging of the country’s population,” said Jeon Seung-cheol, a deputy governor of the BoK.

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