IMF Lowers South Korea's Economic Growth Forecast to 2.5% from 3% This Year... "Inflation to Rise 4%"

Global Economic Growth Rate Lowered from 4.4% to 3.6%... "Reflecting Supply Chain Disruptions and Inflation Due to War"

[Asia Economy Washington (USA) = Reporter Kwon Haeyoung] The International Monetary Fund (IMF) has lowered South Korea's economic growth forecast for this year by 0.5 percentage points. This is the first forecast released since the Russia-Ukraine war broke out last February, and it expects a significant slowdown in global economic growth, including South Korea, due to supply chain disruptions and inflationary pressures caused by the war. South Korea's inflation rate, which surpassed 4% for the first time in 10 years last month, was revised upward by 0.9 percentage points to an annual rate of 4.0%, indicating a further intensification of inflation.

◆ IMF lowers South Korea's growth forecast by 0.5 percentage points this year... Inflation expected at 4% ＝ On the 19th (local time), the IMF released its World Economic Outlook containing these details. The IMF publishes forecasts for all member countries twice a year in April and October, and issues revised forecasts focusing on major countries in January and July.

In this forecast, the IMF projected South Korea's growth rate at 2.5%, down 0.5 percentage points from the January forecast of 3.0%. This marks another downward revision just three months after the January update, which itself was a revision from the October forecast of 3.3%. Unlike previous forecasts, this revision fully reflects the impact of the Russia-Ukraine war. The South Korean government and the Organisation for Economic Co-operation and Development (OECD) had projected growth rates of 3.1% and 3.0%, respectively, at the end of last year, but further downward revisions through updated forecasts are inevitable.

South Korea's consumer price inflation for this year was projected at 4.0%, up 0.9 percentage points from the January forecast of 3.1%. Compared to major countries such as the United States (7.7%), the United Kingdom (7.4%), Canada (5.6%), Germany (5.5%), and France (4.1%), South Korea's inflation rate is relatively low. The government explained that the rise in oil prices due to the war was partially offset by efforts such as the reduction of fuel taxes.

An official from the Ministry of Economy and Finance stated, "Although the IMF has downgraded our economic outlook, the adjustment is relatively small compared to the world and major advanced countries," and added, "Despite increased inflationary pressures following the war, South Korea is showing relative resilience." The official noted that the downward revisions are smaller compared to Germany (-1.7 percentage points), the UK (-1.0 percentage points), Japan (-0.9 percentage points), and India (-0.8 percentage points).

According to the IMF, the average growth rate from 2020 to 2022, excluding the base effect caused by the COVID-19 shock, was 1.85%, second highest among the Group of Seven (G7) countries after the United States (1.92%). The average growth rate from 2020 to 2023 was 2.11%, surpassing all G7 countries.

◆ Supply chain disruptions and inflation due to war... "Significant slowdown in global economy" ＝ In this forecast, the IMF expects a significant slowdown in global economic growth. The world economy is projected to grow by 3.6% this year, down 0.8 percentage points from the January 2022 forecast of 4.4%.

Looking at major countries, the United States' growth forecast for this year fell from 4.0% in January to 3.7%. Germany (3.8% → 2.1%), the United Kingdom (4.7% → 3.7%), Japan (3.3% → 2.4%), India (9.0% → 8.2%), and China (4.8% → 4.4%) also saw downward revisions. War-torn Russia is expected to contract by -8.5%, and Ukraine by -35.0%, representing declines of 11.3 and 38.6 percentage points respectively compared to previous forecasts.

The IMF identified the following risks to the global economy this year: ▲ supply chain disruptions caused by worsening war conditions ▲ inflation ▲ the possibility of protectionism and restrictions on technology exchange due to Russian debt default ▲ social unrest caused by soaring oil and food prices and refugee flows ▲ resurgence of COVID-19 ▲ prolonged slowdown in China's growth ▲ interest rate hikes and increased debt burdens.

The 2023 global economic growth rate was projected at 3.6%, 0.2 percentage points lower than the previous forecast of 3.8%. Due to rising commodity prices, supply chain disruptions, increased inflation expectations, and tight monetary policies, growth next year could fall by as much as 2.5 percentage points compared to 2021's 6.1%.

From a policy perspective, the IMF recommended flexible fiscal and monetary policies tailored to each country's circumstances. While tight monetary policy is necessary to combat inflation caused by the war, selective reductions in fiscal support for vulnerable groups affected by COVID-19 and the war should be approached cautiously.