The export-driven Korean economy could lapse into a prolonged slump as major advanced and emerging nations have run out of policy tools to spur their slowing economies, sources said Sunday.
Such a concern has materialised as the International Monetary Fund (IMF) on Monday revised down its growth forecast for the world economy to 3.5 percent, down 0.1 percentage point from its earlier estimate, according to the Korea centre for International Finance.
In particular, the international lending body cut its forecast for South Korea and other newly industrialising Asian economies to 2.7 percent from an earlier 4.3 percent.
The IMF singled out South Korea, which relies heavily on exports for its economic growth, as one of the economies most vulnerable to a slowdown in the global economy.
The South Korean economy, Asia’s fourth-largest that is dependent for overseas shipments, is facing headwinds stemming from escalating external uncertainties and slackening overseas demand, it said.
To make matters worse, experts said, the United States and major advanced economies have nearly emptied their toolboxes to bolster economic growth.
In a report, Goldman Sachs pointed out that major advanced nations find it difficult to take additional stimulus measures due to their high fiscal deficits and further cut their already low interest rates.
The US Fed has retained near-zero interest rates since the end of 2008, while economists call into question the efficacy of a possible third-round quantitative easing.
The European Central Bank also maintains its bellwether interest rate at a record-low level of 0.75 percent.
China, Brazil and India, which have cut interest rates several times, may find it difficult to lower borrowing costs further, according to the experts.
Against such a backdrop, the growth rate of South Korea’s economy could drop below the 2 percent range this year, analysts pointed out.
Bank of America Merrill Lynch recently said that in the worst-case scenario, Korea’s economic growth rate could fall as low as 1.8 percent this year if the eurozone debt crisis and global economic conditions worsen.
This is much lower than the government’s estimate of 3.3 percent and the Bank of Korea’s 3 percent growth projections. The government and the central bank both recently revised down their growth outlooks from 3.7 percent and 3.5 percent, respectively.