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In order to reflect a weaker-than-expected recovery in 2H15, we have further cut the 2015 GDP growth estimate to 2.4% from 2.6%. The 2016 forecast is also lowered to 3.3% from 3.7%. Exports have continued to languish due to falling demand from China and weakening competitiveness in Korea's electronics sector. An imminent recovery appears unlikely. And even if exports demand improves, manufacturing output would remain depressed for some time as extra inventory needs to be digested.
Nonetheless, DBS Bank's analysts still thinks growth has bottomed in 2Q15 and will pick up in in 2H15-2016. Domestic demand will be the key driver. Consumer sentiment is improving as the impact of MERS is fading. The property market remains on a cyclical upturn thanks to the fall in interest rates to record lows. Public spending will also increase as the government's supplementary budget will be implemented in 2H15.
Inflation forecasts are kept unchanged at 0.8% for 2015 but lowered to 1.8% (from 2.1%) for 2016. This considers that the output gap will remain negative for a longer period than previously envisioned.
As growth and inflation have bottomed, we maintain the view that the Bank of Korea is done with rate cuts in the current cycle. But the weaker-than-expected recovery outlook implies that the probability of rate hikes will be remote. We now forecast the BOK will keep the benchmark rate at 1.50% through the next 12 months.
Notwithstanding a possible rise in US rates, the depreciation pressure on the KRW should be moderate and tolerable, thanks to the strength in Korea's international investment position.
