By Kwanwoo Jun

SEOUL--South Korea's government cut its growth forecast for next year despite an expected rebound in exports due to frail consumer spending and slow construction investment.

The 2017 gross domestic product growth estimate was lowered to 2.6% from the July projection of 3%, the Ministry of Strategy and Finance said Thursday in its biannual outlook. Its estimate for GDP growth this year was also revised down, to 2.6% from 2.8%.

The government is preparing a fresh fiscal stimulus package of more than 20 trillion won ($17 billion) with additional tax revenue and state funds for financing small companies, creating more jobs and expanding public services to prop up anemic growth, the ministry said.

It said gradually increasing global demand is expected to help South Korean exports expand 2.9% in 2017 from a year ago--a turnaround after shrinking for two years, but the anticipated rebound will likely be limited by rising international protectionism and a slowdown in China, which takes in a quarter of Korea's shipments overseas.

Weakening domestic demand will likely be a major drag on Korea's economy in 2017, the ministry said, with growing household debt, continuing corporate restructuring and cooling home construction expected to keep weighing on consumer spending and growth.

Consumer prices are expected to rise 1.6% in 2017, slower than the July forecast of a 1.9% gain, following an estimated 1% increase this year, the ministry said.

The current-account surplus is likely to narrow to $82 billion in 2017 from this year's estimated $94 billion, the ministry said. About 260,000 new jobs are expected to be added in 2017, fewer than the 290,000 jobs likely created this year, it said. Corporate restructuring is under way to overhaul the heavily indebted shipping, shipbuilding, steel and petrochemical industries.

South Korea's anemic economy needs accommodative policy to support growth, the ministry said. The central bank has been in an easing cycle for years. The bank most recently cut its policy rate in June to a record-low 1.25%. The government has drawn up an extra budget nearly every year. It plans to frontload budget spending in the first quarter to counter a possible slowdown.

Write to Kwanwoo Jun at kwanwoo.jun@wsj.com

(END) Dow Jones Newswires

December 28, 2016 18:14 ET (23:14 GMT)

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