IMF Global Economy Expected to Contract... Bank of Korea Also Considering Revising Economic Outlook in May

Bank of Korea Projects Global Growth Rate at 3.0% in February Economic Outlook
IMF's Negative Growth Forecast for This Year Likely to Lower Growth Rate

[Image source=Yonhap News]

[Asia Economy Reporter Kim Eun-byeol] The International Monetary Fund (IMF) has forecast South Korea's growth rate at -1.2% this year and predicted a global economic contraction of -3%, increasing concerns for the Bank of Korea. This comes ahead of the revised economic outlook scheduled for next month.

On the 14th (local time), the IMF released its World Economic Outlook, stating that "considering South Korea's high degree of external openness, sluggish external demand due to the sharp downward revision of growth forecasts for major trading partners will constrain growth." The IMF lowered South Korea's growth forecast by 3.4 percentage points from the previous estimate of 2.2%. Growth rates for South Korea's major trading partners were also revised downward, and the global economy was adjusted down by 6.3 percentage points compared to the January forecast. The U.S. growth rate for this year was projected at -5.9% (a 7.9 percentage point downward revision), the Eurozone at -7.5% (8.8 points down), and China was lowered from 6% to 1.2%, a 4.8 percentage point drop. Given South Korea's export-dependent economic structure, a significant decline in the economic growth rates of major global economies inevitably impacts South Korea.

The Bank of Korea will release its revised economic outlook next month. In February, during the early stages of the COVID-19 pandemic, the Bank projected this year's growth rate at 2.1%. Governor Lee Ju-yeol opened the possibility on the 9th that South Korea's growth rate could fall into the 0% range this year but did not expect it to drop into negative territory. Assuming the COVID-19 situation improves and the economy rebounds, growth in the 0% range could be expected.

At that time, Governor Lee said, "Due to the global spread of COVID-19, growth and inflation trends are expected to fall significantly below previous forecast paths," but added, "The domestic economy is expected to achieve positive (+) growth this year."

However, if the global economy contracts, the Bank of Korea may have to revise its growth forecast downward more than currently anticipated. In February's economic outlook, the Bank assumed a global economic growth rate of 3.0%, reflecting the economic conditions of major countries. The 2021 growth rate was assumed to be 3.3%.

The Bank's forecast was based on projections from institutions such as the IMF, World Bank (WB), and the Organisation for Economic Co-operation and Development (OECD). With the IMF, one of the institutions providing the growth assumptions, presenting a notably pessimistic scenario, the Bank of Korea's downward revision of growth forecasts is inevitable, though lowering it into negative territory remains uncertain.

Experts also see a high possibility that a significant downward revision in the Bank of Korea's May economic outlook could lead to additional interest rate cuts. Kim Ji-na, a researcher at IBK Investment & Securities, stated, "There is a high likelihood that the growth forecast will be significantly lowered in the May Monetary Policy Committee meeting and revised economic outlook." She added, "Given that the real economy is already acknowledged to be in recession, a sharp downward revision in the May outlook could lead to further base rate cuts by the Bank of Korea, possibly as early as May or later in the second half of the year."

However, the South Korean government is interpreting the IMF announcement optimistically. The Ministry of Economy and Finance noted that among the 36 OECD member countries, South Korea's downward revision in economic growth (-3.4 percentage points) is the smallest, and the growth forecast of -1.2% this year is the highest.

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