"US and European Economic Slowdown Negatively Impacts Korean Economy... Different Effects on Growth and Inflation"

Probability of Economic Recession Within the Next Year: Europe 32%, US 15%

[Image source=Yonhap News]

[Asia Economy Reporter Seo So-jeong] Recent analyses suggest that if the economic slowdown in the US and Europe coincides with a delayed recovery in China's growth, it could have a negative impact on South Korea's economy, which has a high trade dependence on these countries.

On the 14th, the Bank of Korea stated in its 'Assessment of US and European Recession Risks and Implications' (BOK Issue Note) that "if a recession in the US and Europe materializes, it is expected to significantly affect our economy through trade channels and other routes."

According to the report, while the possibility of recession has increased in both the US and Europe, the short-term risk of recession is assessed to be higher in Europe than in the US. The Bank of Korea estimated the probability of a recession occurring within the next year using a distribution forecasting model, finding that Europe's recession probability (32%) is higher than that of the US (15%).

The US faces considerable risks in suppressing demand to counter high inflation, but factors such as a robust labor market and sound household financial conditions may act as buffers against shocks. However, the report explains that if high inflation persists and interest rate hikes accelerate, the labor market may adjust faster than expected.

In Europe, the prolonged possibility of Russia's gas supply disruption is a major risk, with ongoing supply chain disturbances due to war and abnormal weather also posing threats. While favorable employment conditions and accumulated household savings may mitigate shocks, the relatively greater influence of supply-side factors and differing policy environments among countries make effective responses challenging. Additionally, relatively high household debt levels are identified as a vulnerability.

In particular, the report notes that if the US and European economies enter recession, the impact on domestic growth and inflation may vary depending on the source of the shock (demand or supply shock) and the global economic transmission patterns. A US recession leading to reduced external demand is expected to simultaneously slow domestic growth and inflation, whereas a supply shock originating from Europe causing raw material price increases could lower domestic growth rates while expanding inflation.

The report added, "Given the very high global uncertainty, it is necessary to carefully monitor the developments and their economic impacts."

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