Foreign investment banks lowered their 2012 outlooks on South Korea’s consumption growth in the private sector to the 1 percent range, the Korea Center for International Finance said on Wednesday.

HSBC scaled down Korea’s forecast for private consumption growth from 2.1 percent to 1.8 percent year-on-year, lower than the Bank of Korea’s revised outlook of 2.2 percent in July.

The global investment bank said that negative outlooks on the nation’s sluggish real estate market prevail, and the sector will have harmful impacts on private consumption.

Korea’s private consumption is most influenced by the fluctuation of real estate prices among major Asian countries, added HSBC. When the Housing Price Index drops by 10 percent, private consumption falls by 0.6 percent to 0.7 percent.

Morgan Stanley expected that employment in the service sector, which has been driving the nation’s employment growth, will slow down due to sluggish private consumption and investment.

Citi Group also projected that the growth of self-employment will not be able to sufficiently support the recovery of private consumption, although the rate of workers here who are self-employed, 41.7 percent in July, was relatively high.

Private consumption grew by 1 percent in the first quarter but was cut in half in the second quarter when the recession worsened, according to the BOK.

Retail sales, in particular, grew by 0.9 percent in April compared to the previous month and 0.7 percent in May, but dropped by 0.5 percent in June. Sales at major large discount stores and department stores have been dropping since April and fell hardest in July since the data compilation began in 2005, at 8.2 percent since the previous month.

The average propensity to consume, referring to consumption expenditure as a percentage of disposable income, marked 74.1 percent this year, which is 0.5 percent lower than the rate right after the global economic crisis in 2008.

The Consumer Sentiment Index also fell from 101 in June to 100 in July after reaching the peak in May with 105. An index reading below 100 indicates that consumers are pessimistic about the economic situation for the six months to come.

Meanwhile, the BOK predicted in July that private consumption in the latter half of this year would grow by 2.9 percent compared to the same period last year.

By Park Min-young (claire@heraldcorp.com)