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Delta variant leads to protracted tightening of private consumption

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Slower-than-expected US growth to affect BOK rate hike

By Lee Kyung-min

Tightened private spending sparked by an increase in COVID-19 infections by the Delta variant is expected to continue throughout the latter half of the year, adding pressure on the Bank of Korea to refrain from a further key rate hike.

The renewed dilemma will be further compounded by slower-than-expected U.S. economic growth as indicated by the assessment in the U.S. Federal Reserve's latest Beige Book report.

Korea has been relatively insulated from the health crisis, due chiefly to containment efforts and high public participation as illustrated by the number of people wearing face masks in public places. But the spread of the highly-infectious Delta variant has prompted health officials to retain the highest Level 4 social distancing measures. Small businesses in the services industries, including those subject to gathering bans, meanwhile, are edging closer to bankruptcy and the tightening of overall consumption is a major roadblock to an economic recovery.

The Korea Economic Research Institute said in a report released Thursday that the country's private consumption will remain weak in the latter half of the year due to the prolonged fourth wave of the coronavirus pandemic.

Private consumption is expected to grow 2.8 percent this year, impacted by downward pressures including rising interest payment burdens due to the central bank rate hike of 25 basis points last month.

The latest assessment stymied a recovery in private consumption in the first half, fanned mostly by expectations of an earlier-than-hoped economic rebound anchored in part by rising asset prices including stocks and real estate, and the country's efforts to contain the spread of the virus.

But as the prospect of achieving herd immunity before the year's end becomes elusive despite vaccination efforts edging up, the country's growth rate may remain in the low 3 percent range, the think tank said.

"If the current spread does not stabilize and the delay in vaccinations sees no improvement, the country's GDP growth will slow," the report said.

The grim assessment is gaining traction, after the Fed reported Wednesday (local time) in its Beige Book that the U.S. economy "downshifted slightly" in August.

The U.S. central bank said this was due to a pullback in the services industries, including dining, travel and tourism, fueled by the renewed surge of Delta variant infections.

Goldman Sachs economists recently revised down their forecast for U.S. growth to 5.7 percent this year, Monday (local time), down from 6 percent made at the end of August.

"The recovery of the Korean economy is underpinned almost entirely by strong exports and fiscal spending. Private consumption tightening is concerning since it is directly linked to how the ordinary citizens feel about their financial condition, a reason why the central bank will need to closely monitor data points arriving in the coming months before raising the key rate," Seoul National University economist Lee In-ho said.


Lee Kyung-min lkm@koreatimes.co.kr


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