IMF cuts growth forecast of Asia‘s 4th-largest economy, worsening trade deficit fuels concerns
South Korea entering the fog of economic uncertainty became more obvious on Tuesday with the International Monetary Fund revising down the country‘s growth forecast and figures showing that trade deficit for the export-led economy is worsening.
In its latest world economic outlook report, the IMF revised down its prediction on the gross domestic product growth of Korea by 0.2 percentage point from its earlier suggestion of 2.5 percent to 2.3 percent, citing the global inflationary pressure, slowdown of China’s economy and the war between Ukraine and Russia.
Further, the US-based organization drastically revised its forecast on the 2023 growth of Korea down to 2.1 percent, from its earlier suggestion of 2.9 percent.
For the 2022 growth outlook, the figure of 2.3 percent, suggested by the IMF, is lower than the prediction of 2.7 percent suggested by the Organization for Economic Cooperation Development in June and the Bank of Korea in May, separately.
This is also lower than 2.6 percent, suggested by the Finance Ministry of Korea and S&P Global Ratings, separately in June, 2.5 percent by Moody’s Investors Service in May and 2.4 percent by Fitch Ratings in June.
The organization predicted that the group of advanced economies -- including the US, Canada, the UK, the eurozone countries, South Korea and Japan -- would post a 2.5 percent growth this year collectively. In April, the IMF forecast a 3.3 percent growth. It said the US economy, in particular, is projected to expand 2.3 percent in 2022 and 1 percent in 2023.
Earlier in the day, the Bank of Korea said the gross domestic product for April-June rose 0.7 percent on-quarter, higher than the 0.6 percent growth in the first quarter - fueled by the government’s decision to scrap practically all COVID-19 restrictions.
“Consumer spending pushed up growth in the second quarter, but it could decline given soaring prices and the worsening pandemic,” said Hwang Sang-pil, a senior BOK official in charge of statistics.
Inflation hit a 24-year high of six percent in June and Korea is also seeing a resurgence in COVID-19 cases amid speculation over revisiting the COVID-19 curbs, like shutdowns.
The worsening trade deficit would deal a blow to the economy, said Hwang, calling the risk of a downturn high as global economic uncertainties, like supply bottlenecks, persist, It is too early to say whether Korea will mark negative growth in quarters to come, he added.
According to Trade Ministry data, the trade deficit in the first half of this year reached $10.3 billion – the largest ever seen in the six-month period. Shrinking investment is adding to woes.
The BOK said exports in the second quarter dropped 3.1 percent on-quarter – the largest decline in two years. In the same period, investment in facilities fell 1 percent while capital investment tumbled 1 percent, marking a decline in a fourth consecutive quarter.
“The trade deficit worsened as energy imports, like oil and coal, offset any gains,” Hwang said, referring a global surge in energy and food costs, sparked by Russia’s invasion of Ukraine.
The latest data on Asia’s fourth-largest economy comes as the Bank of Korea appears set to support another rate hike at its August board meeting to tame persistent inflation.
The bank approved its first-time hike of 50 basis points two weeks ago, despite growth worries, saying Korea faces a lower risk of a recession than the US, which has backed steep rate hike in recent months. US Treasury Secretary Janet Yellen said a downturn was not inevitable.
Analysts expect the Korean central bank to raise borrowing costs at all the remaining meetings this year in August, October and November. They are betting on an increase of 25 basis points at each meeting, which will take its current benchmark rate to 3 percent from 2.25 percent.
That leaves the Korean rate trailing behind the range of 3.5 and 3.75 percent the US is expected to back by year-end, amid mounting worries over a capital drain in favor of better interest rates.
“We have to let it sink that we could lose the rate premium. Precedents show we have made a difference,” BOK Gov. Rhee said, noting the gap had reached as high as one percentage point.