Bank of Korea: "'With Corona' Transition Is a Positive Factor for Growth Rate" (Comprehensive)

Bank of Korea Maintains 4.0% Growth Rate for This Year as in May
Inflation Forecast Revised Upward from 1.8% to 2.1%

On the 26th, Lee Hwan-seok, Deputy Governor of the Bank of Korea (left), and Kim Woong, Director of the Research Department (right), attended the economic outlook briefing held at the Bank of Korea headquarters in Jung-gu, Seoul.

[Asia Economy Reporter Eunbyeol Kim] As the government is considering a 'With Corona' quarantine system, the Bank of Korea evaluated that the 'With Corona' measure could act as a positive factor for the growth rate. However, it stated that it is difficult to present the exact upward adjustment of the growth rate in numbers because it cannot guarantee how much the quarantine system will be relaxed and how much the spread of COVID-19 will increase as a result.

Lee Hwan-seok, Deputy Governor of the Bank of Korea, said at the 'August Economic Outlook Briefing' on the 26th, "If the direction shifts to With Corona, economic activity restrictions will be less despite the spread of COVID-19, so it can act as a positive factor for the growth rate."

The Bank of Korea judged that exports and consumption recovery remain robust despite the fourth wave of COVID-19 and presented this year's growth rate forecast at 4.0%, the same as in May. The inflation rate forecast for this year was revised upward from 1.8% to 2.1%.

Private consumption is slowing down due to the impact of the resurgence of infectious diseases but is expected to gradually improve with the expansion of vaccination and the effect of supplementary budgets (추경). The Bank of Korea expects private consumption to increase by 2.8% annually this year. Facility investment is expected to maintain a solid trend, supported by the global economic recovery, and is forecasted to increase by 8.8% annually this year. Construction investment is expected to turn positive (0.9%) compared to last year's (-0.4%) due to favorable construction starts. Merchandise exports, which increased by 14.4% in the first half, are expected to increase by 4.1% in the second half, resulting in an annual increase of 8.9%. Employment is expected to increase by 200,000 this year and 240,000 next year. The current account surplus is forecasted at $82 billion this year and $70 billion next year. The current account surplus ratio to GDP is expected to remain in the mid-4% range, similar to last year, and decrease to the high 3% range next year.

Considering the robust growth trend and the fact that household debt of 1,800 trillion won is a significant risk factor, the base interest rate was raised from the historically lowest level of 0.50% per annum to 0.75%.

The following is a Q&A with Lee Hwan-seok, Deputy Governor of the Bank of Korea, and Kim Woong, Director of the Bank of Korea's Research Department.

- Why are there no scenario-based growth rate forecasts such as positive or negative scenarios in the economic outlook, unlike in May?

▲ Last year, uncertainty due to the COVID-19 situation was high, so scenario-based growth rates had to be presented, but now the uncertainty is not large enough to produce economic forecasts by scenario. Other central banks are also not releasing scenario-based forecasts. The uncertainty caused by developments such as the number of COVID-19 confirmed cases was greater last year, but now we know more. Various methods and know-how for economic forecasting under COVID-19 have been accumulated.

- If the quarantine authorities shift to 'With Corona,' is there a possibility that this year's growth rate will exceed 4.0%?

▲ If we shift to 'With Corona,' economic activity restrictions will be less despite the spread of COVID-19, so it is expected to act as a positive factor for the growth rate. However, it is difficult to present this in numbers.

- I am curious about the extent of the upward adjustment in private consumption due to the expansion of vaccination and the effect of the supplementary budget (추경).

▲ The vaccination rate forecast reflects the quarantine authorities' schedule (70% second dose by October). However, it is difficult to specify the effect in numbers. As the vaccination rate increases, confidence in activities will increase, positively affecting consumer sentiment. Regarding the supplementary budget effect, the first supplementary budget was explained to raise the growth rate by 0.1 to 0.2 percentage points. Since the current supplementary budget execution scale is larger, it is expected to have a greater impact than the first supplementary budget. However, the effect of the supplementary budget may vary depending on the COVID-19 situation and the local government’s execution plan.

- There are concerns that exports may become unstable due to issues such as semiconductor DRAM. What is the impact on the growth rate?

▲ According to expert institutions' views, it is difficult to say that the semiconductor market will decline. The export forecast was based on expert opinions, and exports are expected to continue to perform well in the second half.

- The terms of trade have worsened for four consecutive months due to rising oil prices. Is there any possibility of improvement?

▲ It is true that the terms of trade have deteriorated due to oil price fluctuations, but exports are showing a favorable trend. Crude oil prices are highly volatile, and the outlook is quite uncertain due to the combined effects of reduced COVID-19 demand, China's slowing growth rate, the strong dollar, and U.S. monetary policy.

- You evaluated that the potential growth rate has fallen to around 2.0%. What is the relationship between the lowered potential growth rate and the monetary policy stance?

▲ It is still difficult to connect the decline in potential growth rate with the monetary policy stance. It is better to consider them separately.

- Will the potential growth rate recover if the COVID-19 situation improves?

▲ It has been analyzed that the decline in potential growth rate was significantly influenced by the COVID-19 shock. Over time, it is expected to return to a trend flow, so it is likely to recover in the medium term.

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