Bank of Korea: "Concerns over US and Europe Recession Spread... Significant Impact on Han Export Expected"

[Image source=Yonhap News]

[Asia Economy Reporter Seo So-jeong] As concerns over economic recessions in the United States and Europe spread, an analysis has emerged that the global economy is facing high risks.

The Bank of Korea's Research Department, US-Europe Economic Team, stated in its July 17 report titled "Assessment of the Possibility of Economic Recession in the US and Euro Area" that "In the case of the US, the Federal Reserve (Fed) is accelerating the normalization of monetary policy in response to high inflation and low unemployment rates, increasing the likelihood of a US economic recession."

With the US consumer price index rising 9.1% year-on-year in June, the possibility of a 1.0 percentage point increase in the policy rate at the July Federal Open Market Committee (FOMC) meeting has been raised, and the pace of monetary tightening is expected to accelerate further.

According to the report, US GDP declined in the first quarter, and nowcasting figures (real-time GDP forecasts) for the second quarter from major institutions such as Bank of America (-1.2%) and Deutsche Bank (-0.6%) are also negative. Regarding the "possibility of a US economic recession within one year," Morgan Stanley and Citigroup each forecast up to 50% probability.

Since the beginning of this year, the Fed's economic outlook has been significantly revised downward. The Fed estimates that the probability of a recession occurring one year ahead, as implied by the short-term forward spread, is gradually increasing and will reach 35% by the end of next year. Under scenarios of intensified monetary tightening, the probability of recession rises to 60%.

In the case of the Euro area economy, considering relatively low core inflation (excluding energy and food prices) and a stable labor market, the possibility of recession is not as high as in the US. However, the Bank of Korea diagnosed that the possibility of recession is gradually increasing due to expanded geopolitical risks and the resulting deterioration in economic agents' sentiment.

In particular, concerns are growing over the "tail risk"?a low-probability but high-impact risk?that a full halt of Russian gas supply could lead to manufacturing production disruptions and inflationary pressures, making recession a reality.

The European Central Bank (ECB) projected that in the worst-case scenario where imports of Russian energy are completely halted from the third quarter of this year, the Euro area's growth rates for this year and next year would be 1.3% and -1.7%, respectively.

The Bank of Korea stated, "A gas-driven recession would significantly impact the European Union (EU) economy, which is a large domestic market including the Eurozone, and is expected to have a considerable ripple effect on our exports."

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