The Bank of Korea Lowers Next Year's Growth Forecast to 2.2%... "Economic Recovery Delayed"

China's Economic Slowdown and Continued US Tightening
International Oil Prices Soaring Also a Burden

The Bank of Korea maintained its economic growth forecast for this year at 1.4% but revised down next year's growth forecast from 2.3% to 2.2%. This reflects the assessment that economic recovery will not be easy due to the recent slowdown in China's economy being more severe than expected, additional tightening expected in the U.S., and rising international oil prices, among other uncertainties.

Bank of Korea Lowers Next Year's Growth Forecast... Experts Say "Outlook is Negative"

On the 24th, the Bank of Korea maintained South Korea's economic growth forecast for this year at 1.4%, the same as the forecast made in May, through its revised economic outlook. The growth forecast for next year was lowered from the initial 2.3% to 2.2%. It is interpreted that although China's economic recovery, on which South Korea is highly dependent, is delayed, there is no major problem for growth recovery in the second half of this year. Since the growth rate in the first half of this year was 0.9% compared to the same period last year, a 1.7% growth in the second half is required to meet the Bank of Korea's forecast. Considering recent export conditions and the economy, this is not an easy goal.

The slowdown in China's economy is cited as the biggest problem. Kang Sam-mo, a professor of economics at Dongguk University, pointed out, "South Korea's economy is highly dependent on trade, so the Chinese market, which accounts for the largest share of the export market, is important," adding, "Even if China's economy partially recovers, many opinions suggest it will not improve as much as before, so it is highly likely to have a negative impact on our economy."

Kang In-su, a professor of economics at Sookmyung Women's University, also said, "Although the share of China in exports has decreased, the absolute amount is still large, so it is not a situation where the decrease in exports to China can be offset by exports to the U.S. in the second half," adding, "Although the Chinese authorities are implementing stimulus measures, their effects are not showing well, and the risk of collapse of real estate companies is emerging, so the possibility of China's economy recovering in the second half seems very low."

China's Economic Slowdown, U.S. Tightening... Next Year's Economy More Unstable

The Bank of Korea and the government continue to explain that South Korea's economy will show a 'low in the first half, high in the second half' pattern, but concerns are emerging that if instability in China's real estate market grows and deflation (price decline) becomes full-fledged, not only will China's export recovery be delayed, but the ripple effects will expand to domestic financial and foreign exchange markets. Since Chinese capital accounts for a significant portion of the domestic bond market, if Chinese capital outflows begin in the future, it could also affect interest rates and the stock market.

In particular, if the U.S. Federal Reserve (Fed) raises interest rates further within the year due to stronger-than-expected domestic employment and consumption conditions, there is a risk of increased capital outflows and exchange rate problems. Cho Kyung-yeop, head of economic research at the Korea Economic Research Institute, explained, "Even if the interest rate gap between Korea and the U.S. widens to 2 percentage points, there is no sign of capital outflow yet, but it is uncertain what will happen if the gap widens further," adding, "The Bank of Korea must be deeply concerned."

Immediately after the Jackson Hole speech by Fed Chair Jerome Powell on the 25th, the Bank of Korea's decision to hold the base interest rate this time could backfire. Powell shocked global markets last August at Jackson Hole with strong hawkish (monetary tightening preference) remarks, and if he signals additional rate hikes this time as well, the won-dollar exchange rate could soar, and foreign investment funds might withdraw. This would be the worst-case scenario for the Bank of Korea after holding rates steady. The Bank of Korea's decision to lower next year's growth forecast by 0.1 percentage points also appears to reflect such economic uncertainties.

Inflation Concerns Persist... Watchful of International Oil Price Rebound

Regarding consumer price inflation, although recent stability has been regained, it is still too early to be assured. Through the revised economic outlook, the Bank of Korea forecast consumer prices to rise by 3.5% this year and 2.4% next year, the same levels as in May. Earlier, on the 22nd, Bank of Korea Governor Lee Chang-yong appeared before the National Assembly and said, "There is a possibility that inflation will return to the 3% range in August-September, then slowly fall to below the mid-2% range by the second half of next year," adding, "Among advanced countries, we are the only one whose inflation has fallen below 3%."

However, this forecast assumes that international oil and raw material prices will stabilize downward as initially expected. Major oil-producing countries such as Saudi Arabia continue to cut production to raise oil prices, and Brent crude, the global benchmark, has already risen to the mid-$80 range. Although it has recently stalled again due to concerns about China's economic slowdown, since Saudi Arabia and others are likely to continue production cuts in October, there is room for further increases until the end of the year.

Ha Jun-kyung, a professor of economics at Hanyang University, explained, "The rapid decline in inflation so far has been largely due to the fall in international oil prices, but now the base effect is ending and core inflation is not being controlled," adding, "If dining out and service prices continue to rise in the second half, there will be pressure to raise labor costs, and the rising oil price trend could also act as a factor pushing inflation up."?

Lee Chang-yong, Governor of the Bank of Korea, is presiding over the Monetary Policy Committee meeting held at the Bank of Korea in Jung-gu, Seoul, on the morning of the 24th, striking the gavel. Photo by Joint Press Corps

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