South Korea announced a stimulus package of more than 15 trillion won ($13 billion) on Thursday, including a supplementary budget, and slashed its economic growth forecast for the year as a deadly outbreak of the MERS virus added to pressure on the already shaky economy.
Finance Minister Choi Kyung-hwan said although there were concerns a supplementary budget could hurt fiscal soundness, the heavy impact of the MERS outbreak demanded immediate measures to combat weak growth.
"I am concerned growth will lag below 1 percent for a fifth straight quarter into the second quarter, and the current situation can develop into more low growth," Finance Minister Choi Kyung-hwan told a a press conference in Seoul.
Earlier, Lee Chan-woo, director-general of economic policy at the Ministry of Strategy and Finance said the MERS outbreak was likely to take 0.2 to 0.3 percentage points off economic growth, adding the government now aims to present a finalized supplementary budget by early July.
Lee said growth this year could reach 3.1 percent but only with the help of the supplementary budget.
Data earlier in the day showed consumer sentiment in June fell to its lowest since late 2012.
An expansionary stance will be kept for monetary policy to ensure recovery continues, the finance ministry said. The key borrowing rate in South Korea currently stands at a record low 1.50 percent after the Bank of Korea last cut interest rates in June.
MERS affected 180 patients and 29 had died from the virus as of Thursday. Fear of contracting MERS has kept South Koreans at home and not spending, although the Bank of Korea Governor said on Wednesday that economic indicators linked to MERS are improving.
Sales at department and discount stores in the first week of June both recorded double-digit declines compared to average sales in the previous two weeks, finance ministry data showed.
South Koreans also avoided movie theaters and amusement parks, deepening the troubles of service industries reeling from holiday cancellations by thousands of overseas tourists.
The ministry said the economy will improve gradually on domestic consumption, benefiting from cheap oil, low interest rates, the recovery in asset markets, and expansionary macroeconomic policies.
The current account surplus is expected to reach $94.0 billion this year, up from an earlier forecast of $82.0 billion. The revised inflation outlook was 0.7 percent for 2015, down considerably from the 2.0 percent forecast earlier.