Wednesday, July 6

Korea Cuts Economic Growth Outlook, Raises Prices as Woes Mount


South Korea’s government downgraded its economic growth forecast for this year to less than the central bank’s outlook and raised its inflation estimate higher, underscoring mounting challenges for policy makers.

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(Bloomberg) — South Korea’s government downgraded its economic growth forecast for this year to less than the central bank’s outlook and raised its inflation estimate higher, underscoring mounting challenges for policy makers.

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The Finance Ministry now sees gross domestic product advancing 2.6% and consumer prices rising 4.7% in 2022, a deterioration from 3.1% and 2.2% previously, according to a statement. That compares with the Bank of Korea’s forecasts last month of a 2.7% expansion and 4.5% inflation.

Countries worldwide are struggling with softer economic growth and soaring consumer prices with the World Bank warning last week of a risk of stagflation. Russia’s war on Ukraine and China’s virus lockdowns are driving up energy, food and product prices, weighing on household spending and business activity .

South Korea recorded its first current account deficit in two years in April as higher energy and commodity prices drove up the cost of imports. The export-reliant economy has posted trade deficits in most of the past five months, with shipments for the first 10 days of June producing another shortfall.

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Central banks have homed in on inflation as the biggest threat to their economies. BOK Governor Rhee Chang-yong has signaled another interest-rate hike is likely next month as he stressed the importance of reining in price pressures. The Federal Reserve raised rates by 75 basis points this week as inflation holds well above 8% in the world’s largest economy.

Consumer prices in South Korea rose 5.4% in May, the fastest pace since 2008, and the central bank expects it to remain in the 5%-range through next month.

While the economy is seen expanding this year at a slower pace than the government’s previous forecast, the Finance Ministry expects employment will climb by 600,000. That’s more than double its previous estimate of 280,000, reflecting the dissipation of risks from the omicron variant.

The nation’s current account will likely end the year with a surplus of $45 billion, compared with a previous prediction of $80 billion, the ministry said, pointing to the sharp jump in oil prices and more Koreans traveling abroad.

The economy expanded 4.1% last year, rebounding faster than most developed nations. Policy makers remain hopeful that exports will continue to underpin growth, while consumption will pick up with the lifting of more virus restrictions.

In 2023, the economy will probably grow 2.5% with inflation cooling to 3%, the ministry said.



financialpost.com

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