IMF, South Korea Growth Rate 3.6%... Vaccine + Stimulus Likely to Raise Global Outlook (Comprehensive)

Continued Monetary Stimulus Amid Vaccine Rollouts Worldwide

US Economic Stimulus Drives Global Economic Upturn

Korea Also Sees Export Growth Amid Global Economic Recovery

Additional Budget Effects Reflected

Risks from Overheating Economy and Inflation Boomerang

Powell: "Fed Support to Be Gradually Withdrawn"

[Asia Economy Reporter Kim Eunbyeol, Sejong=Reporter Son Seonhee] The International Monetary Fund (IMF) has raised South Korea's economic growth forecast for this year to 3.6% just two months after its previous projection. This is a 0.5 percentage point increase from the 3.1% forecast presented in the January World Economic Outlook (WEO). The acceleration in COVID-19 vaccine rollouts and export growth have driven the upward revision, indicating that the global economic recovery is occurring faster than expected.

In the Korea Annual Consultation report released on the 25th (local time), the IMF stated, "Real Gross Domestic Product (GDP) growth is projected at 3.6%, supported by the gradual normalization of COVID-19 related factors and increased external demand." The IMF expressed a positive outlook on the Korean economy, which has a high export ratio, alongside expectations of faster recovery in major economies due to vaccine distribution. Initially, the IMF raised the growth forecast to 3.4%, but following the Korean government's announcement of an additional supplementary budget (chugyeong), it further increased the forecast by 0.2 percentage points.

The IMF's upward revision is expected to influence other economic analysis institutions' assessments. Earlier this month, the Organisation for Economic Co-operation and Development (OECD) raised South Korea's growth forecast to 3.3%. The Bank of Korea has also indicated plans to revise its growth forecast upward, likely to be announced in the economic outlook report scheduled for May. Hong Nam-ki, Deputy Prime Minister and Minister of Economy and Finance, commented on the IMF announcement, stating, "We will do our utmost to actively leverage the global economic upturn opportunity so that our economy can be among the leading groups to emerge first from the COVID-19 crisis."

With the IMF raising South Korea's growth forecast by 0.5 percentage points to 3.6%, expectations for global economic recovery are also increasing. The IMF releases its WEO report annually in April, and there is growing anticipation that the global growth forecast will also be revised upward from the 5.5% projection made in January. A Ministry of Economy and Finance official said on the 26th, "Economic recovery is accelerating mainly in North American countries such as the US and Canada, where vaccine distribution has been relatively swift," adding, "An upward revision of the global growth rate is expected." The global economic recovery is supported not only by COVID-19 vaccine distribution but also by continued 'massive monetary stimulus' this year. There is optimism that herd immunity could be achieved by the end of the year, and countries have indicated their intention not to halt accommodative monetary and fiscal policies.

US $2.1 Trillion Economic Stimulus Also Boosts Korea’s Supplementary Budget Effects

When the IMF released its World Economic Outlook in January, the US economic stimulus package worth $1.9 trillion (approximately 2,150 trillion KRW) had not yet been passed. Although President Joe Biden had announced the stimulus plan, there were doubts about whether it would pass Congress due to bipartisan opposition from Republicans. After intense debate, the US stimulus package was approved earlier this month, and reflecting this, the Federal Reserve (Fed) on the 17th (local time) sharply raised its growth forecast for this year from 4.2% to 6.5%. With US growth jumping into the 6% range, the global economy is bound to recover alongside.

As an export-driven economy, Korea is particularly influenced by global economic conditions. According to the Korea International Trade Association, Korea's exports to the US accounted for 14.5% last year, ranking second after China (25.9%). A strong recovery in the US economy leads to increased exports to the US and thus higher growth rates.

Korean exports are already showing strong momentum. February exports rose 9.5% year-on-year, continuing the growth trend from December last year (12.4%) and January this year (11.4%). This year’s exports are also expected to benefit from the base effect caused by last year’s downturn.

Risks of Economic Overheating and Inflation ‘Tightening Boomerang’ Pose Concerns

The upward revision of growth forecasts is positive for now. However, if the economy expands faster than expected, inflation will rise, increasing the likelihood of monetary tightening, which is a concern. Particularly problematic is the astronomical increase in debt during the COVID-19 response, coupled with slow recovery in domestic demand, face-to-face service industries, and employment. The IMF projects Korea’s inflation rate at 1.2% this year, while the Bank of Korea expects inflation to rise by more than 1.3% compared to last year.

The New York stock market showed weakness early on the 25th (local time) for these reasons. Fed Chair Jerome Powell said in an interview with US public radio (NPR), "When the economy is 'all but fully' recovered, the Fed can gradually withdraw its support measures." Although he added, "That time is not yet," the mere mention of withdrawal caused market volatility. Additionally, last week’s US unemployment claims fell below 700,000, marking the lowest level since the COVID-19 outbreak, which further fueled tightening concerns.

Meanwhile, IMF directors recommended in the report that Korea maintain expansionary fiscal policies and continue accommodative monetary policies. However, they advised close monitoring of the impact on the real estate market and recommended preparing complementary measures to ease labor market rigidities to promote potential growth.

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