Korea’s GDP forecast plummets to 3.8%

We cut the GDP forecast for 2011 to 3.8% from 4.1%, while keeping the 2012 forecast unchanged at 4.1%. The downward revision mainly reflects the growth slowdown expected in late-3Q/early 4Q, as a result of the G2 recession worries and global financial market unrest.

Korea’s exports have not exhibited signs of slowdown as of August, but business sentiment in the export oriented manufacturing industry has deteriorated sharply. There is such risk that manufacturers will hold off production and investment plans for some time until clarity returns in the global economy.

With regard to the economic impact via the financial channel, we believe Korea now has stronger capability to withstand the risk of capital outflows, thanks to the substantial improvement in its international liquidity position after 2008.

In accordance with our view that the financial market volatility is manageable and the slowdown in exports will not be long lasting, we think domestic demand should remain resilient to underpin the economy in 2H11.