South Korea's economy is positioned to face heightened downside risks as the trade dispute between the United States and China escalates, hurting global trade and manufacturing activity, a senior presidential secretary said Sunday.

"I think we cannot rule out the possibility of the downside risks being drawn out as external uncertainties have increased further than what we expected," Yoon Jong-won, senior secretary for economic affairs, told reporters.

"The global economy is on a downward path, and the trade dispute (between the U.S. and China) is escalating," he said.

Yoon Jong-won, senior secretary to President Moon Jae-in for economic affairs

His remarks came amid rising concerns that Asia's fourth-largest economy may lose upward momentum amid falling exports triggered by the ongoing American-Sino trade war and a drop in business spending.

The decline in the country's exports in May exceeded expectations, extending their slump for the sixth consecutive month, as the trade war between the country's top two trading partners and a drop in chip prices continued to weigh on outbound shipments.

The economy unexpectedly contracted 0.4 percent in the first quarter of the year from three months earlier, marking the worst performance in a decade, due to a sharper-than-expected dip in exports and facility investment.

In April, the Bank of Korea trimmed its growth outlook for the year to 2.5 percent from 2.6 percent but expected the economy will gather pace during the second half of the year, which many claim is too optimistic.

Since November, the central bank held its key rate steady at 1.75 percent given economic uncertainties but faces mounting calls for a rate cut to help boost the economy amid low inflation. BOK Gov. Lee Ju-yeol said earlier a prolonged U.S.-China trade war will further heighten uncertainty.

Against this backdrop, the government will focus on invigorating economic vitality with aggressive policy responses, Yoon said.

"We need a more active policy response amid increased downside risks," Yoon said.

The presidential secretary called on the National Assembly to quickly approve the 6.7 trillion-won (US$5.8 billion) budget bill, which will help improve the economy, as well as create more jobs.

The bill, submitted to the parliament in late April, is still pending due to political strife over some contentious issues.

The economy may further slide some or rebound depending on external conditions, but it seems to be bottoming out, he said. (Yonhap)

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