The South Korean economy is forecast to grow 3.8 percent this year on the back of strong export growth and expansionary macroeconomic policy, the Organization for Economic Cooperation and Development said Monday, ramping up its previous projection of 3.3 percent.

“Strong overseas demand for IT products, which account for about a fifth of total exports and automobiles is lifting exports. A gradual easing of distancing measures and government relief packages have helped vulnerable households and firms,“ the OECD said in a report on the global economic outlook.

Although distancing measures have mostly contained the COVID-19 spread, it still weighs on large parts of the service sector, it said.

The government has banned gatherings of five or more people across the country under a Level 2 social distancing. The measure, the third highest in a five-tier system, is in place till June 13 in the capital Seoul and its surrounding areas, with Level 1.5 in force in other areas.

“When those restrictions can be lifted, the economy will gather momentum,” the OECD said.

The OECD said policy support should continue to target vulnerable households and businesses until the economy is on a “firmer recovery path,” and vaccination should be accelerated. A total of 5.4 million people or 10.5 percent of the total population have received their first shots of COVID-19 vaccines as of Monday.

Last week, the Bank of Korea revised up its growth outlook for the country this year by 1 percentage point to 4.0 percent as exports rose more than expected.

Prospects for stronger economic growth appear to be attributable to a supplementary budget worth nearly 15 trillion won ($13.53 billion) approved by the National Assembly in March.

If BOK’s 4.0 percent growth forecast is realized, it would mark the country’s fastest economic growth since 2010. Its growth rate 11 years ago reached 6.8 percent after recovering from the 2008–2009 global financial crisis.

After experiencing a 1 percent contraction last year, Asia’s fourth-largest economy grew by 1.6 percent in the first quarter from the previous quarter, bouncing back to pre-pandemic levels, driven by the heavy industry sectors such as chip and electronic manufacturing, mostly for exports.

Reflecting growth in outbound shipments and recovery of the real economy, local and global financial institutions have been upgrading their forecasts for Korea’s GDP growth.

The International Monetary Fund last month raised its outlook to 3.6 percent from 3.1 percent. JP Morgan, the Korea Institute of Finance and LG Economic Research Institute expected the annual economic growth would exceed the 4.0 percent level.

Despite the sanguine outlook, President Moon Jae-in said last Thursday that it is necessary to maintain an expansionary fiscal policy until at least next year for the economy to achieve a clear rebound and resolve inequality stemming from the COVID-19 pandemic.

“There are industries and companies that are growing significantly due to the recovery of the manufacturing industry and the second startup boom, while the recovery is slow and difficulties are accumulating in domestic consumption related industries including in-person services,” he said.

The central bank on Thursday kept its benchmark interest rate frozen at 0.5 percent at the Monetary Policy Committee meeting as it had for the past 11 consecutive months.

By Park Han-na (hnpark@heraldcorp.com)