Global IB Lowers South Korea Growth Forecast Again... Outlook Drops to 0% Range

Citigroup "Bank of Korea May Cut Interest Rates After March FOMC"

[Image source=Yonhap News]

[Asia Economy Reporter Kim Eunbyeol] As the novel coronavirus infection (COVID-19) spreads beyond Asia to the entire world, global investment banks (IBs) are consecutively revising down South Korea's economic growth rate. There are even forecasts that growth could record in the 0% range in the worst-case scenario. The analysis suggests that the recovery of growth rates will slow down due to the global spread of COVID-19.

On the 6th, Nomura Group predicted in a report that South Korea's economic growth rate could be 0.2% this year. Of course, this figure assumes an extreme scenario. Under the base scenario, they forecast 1.4% growth. This is a 0.4 percentage point downward revision from the initial forecast of 1.8%.

JP Morgan lowered South Korea's growth forecast to 1.9%. This is a further revision reflecting the impact of COVID-19, after previously lowering the growth forecast from 2.3% to 2.2% a month ago. JP Morgan stated, "The annual growth forecast for this year is revised down from 2.3%, which was projected before the outbreak of COVID-19, to 1.9%."

They also said, "Considering the spread of COVID-19 and the downward trend in growth forecasts of various countries including the United States, economic recovery in South Korea is expected to be delayed after the first-quarter impact," adding, "We lower South Korea's second-quarter gross domestic product (GDP) growth forecast to 0.9% quarter-on-quarter."

International credit rating agency Standard & Poor's (S&P) also forecast that South Korea's economic growth rate will decline to around 1.1% this year. Earlier, on the 19th of last month, S&P had revised South Korea's growth forecast down from 2.1% to 1.6%. S&P estimated that discretionary consumption accounts for about 25% of South Korea's GDP and presented this growth forecast accordingly. S&P stated, "South Korea is in a situation of very high uncertainty due to community infections within the country," and added, "Citizens are refraining from outdoor activities to minimize infection risk, which leads to a decrease in discretionary consumption expenditure."

S&P forecast China's and Japan's economic growth rates this year to be 4.8% and -0.4%, respectively.

The Institute of International Finance (IIF) also simultaneously revised down the growth forecasts for the world, the United States, and China this year. According to the International Finance Center, IIF stated, "Future economic outlooks are based on the spread of COVID-19 infections and their consequent impacts," and predicted that the global economic growth rate will be close to 1%, significantly below the previous year's 2.6%.

The U.S. growth rate was revised down from 2% to 1.3%, and China is expected to remain in the 4% range, lower than the previous 5.9%. Additionally, the Federal Reserve's (Fed) emergency rate cuts are analyzed to alleviate concerns about emerging markets' currency depreciation and induce policy coordination, thereby reducing uncertainty caused by COVID-19.

Interest in South Korea's rate cuts among IBs has also increased. In the case of Citigroup, it forecasted that if the number of confirmed domestic cases continues to rise and the Fed implements additional rate cuts at the March Federal Open Market Committee (FOMC) meeting, South Korea might also lower rates in March. It is expected that the Bank of Korea will implement rate cuts in response to the Fed and the South Korean government's supplementary budget announcement.

HSBC predicted that in Asia, China, Malaysia, Thailand, Australia, New Zealand, Vietnam, India, the Philippines, and South Korea will join in policy rate cuts. China, South Korea, Australia, and Thailand are expected to simultaneously expand fiscal spending. Goldman Sachs particularly forecasted that BRICS countries will implement significant rate cuts.

Meanwhile, the Organisation for Economic Co-operation and Development (OECD) focused on the fiscal policies of countries including South Korea. The OECD positively evaluated, "Fiscal policies implemented amid the spread of COVID-19 instill confidence in the economy and reduce debt costs." However, it pointed out that fiscal policy may not be effective in immediately addressing supply disruptions.

This content was produced with the assistance of AI translation services.