SEOUL– The Organization for Economic Cooperation and Development (OECD) on Wednesday slashed its 2022 growth outlook for the South Korean economy to 2.7 percent amid concerns the global economy faces the greater risk of stagflation over the protracted war between Russia and Ukraine.
The OECD’s latest growth outlook for Asia’s fourth-largest economy marked a 0.3 percentage-point cut from its December estimate of 3 percent.
The downward revision is in line with the Bank of Korea (BOK)’s estimate of 2.7 percent. The International Monetary Fund expected the Korean economy to grow 2.5 percent this year.
The OECD also hiked its 2022 inflation outlook for South Korea to 4.8 percent from its earlier forecast of 2.1 percent. The Paris-based organization’s 2022 inflation projection is higher than the BOK’s 4.5 percent estimate and the IMF’s 4 percent forecast.
Despite its downward revision of growth outlook, the OECD said South Korea’s private spending will likely recover on the back of the lifting of virus curbs and the latest extra budget, and investment is set for “solid” growth.
“The recovery in consumption is nonetheless expected to be gradual, as inflationary pressures from commodity prices and supply chain disruptions are being passed on to consumers,” the organization said in a statement.
The South Korean economy has been on a recovery path on the back of robust exports and improving private spending. But heightened economic uncertainty and rising inflation are feared to undercut economic growth.
The country’s gross domestic product (GDP) grew at a slower pace than previously expected in the first quarter as investment and spending weakened. The GDP rose 0.6 percent on-quarter in the January-March period, slowing from a 1.3 percent on-quarter gain in the fourth quarter of last year.
Private spending contracted 0.5 percent last quarter from three months earlier, after expanding 1.5 percent in the fourth quarter.
South Korea faces mounting inflationary pressure, as fuel and food prices have surged due to the Ukraine crisis and global supply chain disruptions. Demand-pull inflation also rose due to the economic recovery.
The country’s consumer prices rose at the fastest clip in almost 14 years in May. Consumer prices jumped 5.4 percent on-year last month, accelerating from a 4.8 percent spike in April.
“Inflation is set to remain elevated, based on the assumption that the embargo on Russian oil pushes up global oil prices in 2023,” the OECD said.
The OECD cut its 2023 growth forecast for South Korea to 2.5 percent from 2.7 percent. It raised Korea’s inflation outlook to 3.8 percent for 2023 from 1.5 percent.
The organization recommended the BOK continue to hike the policy rate “to keep inflation expectations anchored.”
Last month, the BOK raised the key interest rate by a quarter percentage point to 1.75 percent, the fifth rate hike since August last year, to put a lid on inflation and curb household debt. The central bank is widely expected to further raise the borrowing costs in the coming months.
The OECD also recommended the Korean government provide target support to vulnerable people with fiscal spending, a move that will help “contain inflation and structural weaknesses.”
Meanwhile, the OECD lowered this year’s growth forecast for the global economy to 3 percent from its previous estimate of 4.5 percent, citing the fallout of the Ukraine crisis and China’s COVID-19 shutdowns.
Source: Yonhap News Agency