"Korea's Growth Rate to Reach 2.1% This Year... Bank of Korea Faces Difficulty in Further Rate Hikes"

Robert Shubalaman Nomura Group Head Outlook

[Image source=Yonhap News]

[Asia Economy Reporter Seo So-jeong] This year, the South Korean economy is expected to grow by only 2.1%, lower than anticipated, due to a slowdown in export growth and weak domestic demand. This low growth outlook suggests that further base rate hikes by the Bank of Korea will be difficult.

Robert Schwarzman, Head of Asia Economy and Global Market Analysis at Nomura Group, stated this on the 18th as a speaker at the webinar titled "2022 Outlook for the Korean and Chinese Economy and Financial Markets: Structural Changes in the Post-Pandemic Global Economy," hosted by the World Economy Research Institute (Chairman Jeon Kwang-woo).

Currently, major institutions such as the International Monetary Fund (IMF) and the Bank of Korea forecast South Korea's GDP growth rate this year to be around 3%, but Schwarzman predicts it will be lower than that. Although market expectations suggest that the Bank of Korea may raise the base rate 2 to 4 times within the year, potentially up to 2%, Schwarzman believes the Bank of Korea will not implement additional rate hikes.

He pointed out that the slowdown in South Korea's economic growth directly leads to a deceleration in export growth, and the government's tightening of loans to manage household debt will cause private consumption to remain sluggish, posing downside risks to the Korean economy.

Key risk factors that could hinder South Korea's economic growth include policy uncertainty following the March presidential election, the risk that inflation exceeding 3% will persist longer than expected, and the risk of re-lockdowns due to the emergence of new COVID-19 variants after Omicron.

Regarding the Chinese economy, he assessed that "since last year's actual growth rate is estimated to be lower than the official GDP growth rate of 4%, growth slowdown may become more pronounced this year."

Costs rising from the zero-COVID policy, reduced production due to the Beijing Winter Olympics, ongoing regulations on the real estate sector, and the continued tolerance of large shadow debts by local governments are causing economic contraction in China in the first quarter, with foreign trade being the only sector driving nominal growth in the Chinese economy.

Furthermore, he warned that foreign trade is also slowing compared to the previous year, and early this year, the Chinese economy will reach the maximum level of pain it can endure. Accordingly, China's monetary policy is expected to decouple from the global monetary tightening trend, with current easing policies such as additional rate cuts continuing for a considerable period, and fiscal stimulus and government spending projected to increase significantly compared to last year. In the foreign exchange market, attention should be paid to the possibility of supplying dollar liquidity and purchasing yuan to defend against yuan appreciation.

Regarding the global economy, although the COVID-19 pandemic is entering its final phase this year, the shock effects of the pandemic will last longer and bring fundamental and structural changes over the long term.

However, Schwarzman noted, "Even after the COVID-19 pandemic, the natural interest rate continues to decline and remains at a very low level, so major central banks will not need to raise policy rates enough to tighten financial conditions." He added, "This ultimately suggests that the final policy rate level in this tightening cycle is likely to be lower than in the past."

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