Bank of Korea: "Economic Growth Rate to Be Adjusted in Q2" [Q&A]

May Revised Economic Outlook Briefing
Second Quarter Growth Rate Expected to Be Adjusted
Inflation Rate to Rise at Second Decimal Place

[Image source=Yonhap News]

The Research Department of the Bank of Korea stated on the 23rd that "the growth rate for the first quarter recorded 1.3%" and added, "Since a significant portion of the increase is due to temporary factors, it should be adjusted in the second quarter."

At a revised economic outlook briefing held at the Bank of Korea headquarters in Jung-gu, Seoul, the Research Department said, "If the previous quarter's figure is high, the next quarter inevitably declines due to the base effect," but also forecasted that "in the second half of the year, the economy will return to the originally moderate path and continue the improvement trend."

The Bank of Korea maintained its annual inflation forecast at 2.6%, but mentioned there was a revision at the second decimal place. The Research Department explained, "Previously, it was a low 2.6%, but now it can be seen as a high 2.6%," adding, "The forecast has risen to a level slightly lower than 2.65%."

Regarding the expectation that inflation in the second half will fall below 2.5%, they said, "It is expected to be in the high 2% range until the first half and then drop below 2.5% in the second half," and "We anticipate it will approach the low 2% range around the end of this year or early next year."

The following is a Q&A from the May economic outlook briefing with the Bank of Korea Research Department.

- The economic growth rate forecast for next year was lowered compared to the February forecast. What is the background for this?

▲(Lee Ji-ho, Director of Research Department) The forecast for this year rose by 0.4 percentage points. Therefore, even if the growth rate falls next year, the GDP level trend will be higher than this year. This should not be interpreted negatively.

- The reasons cited for consumption performing better than expected in the first quarter growth rate include early release effects of mobile phones, increased outdoor activities due to weather, and early execution of government transfer expenditures. Which factor had the greatest impact?

▲(Lee Ji-ho) It is difficult to specify which factor was the largest, but it is believed that all factors had a balanced influence.

- The GDP gap turning positive was previously projected for the first half of next year. The Governor said early next year. When exactly is this expected? Despite the significant upward revision of the growth rate, why is the timing not much different?

▲(Kim Woong, Deputy Governor) The previous forecast was also for the first half, and it remains so. The reason is that the quarterly trend rose in the first quarter, but the high growth was due to temporary factors, so the trend will adjust. In the second half, the trend will be moderate, so when calculating this, the negative GDP gap narrows and the closing point remains similar. The resolution point can still be seen as the first half of next year.

▲The biggest feature of this forecast is the significant reduction in the negative GDP gap. Since there is a revision of the base year, we will explain this in detail in September.

- Despite the upward revision of the growth rate, the inflation forecast was maintained, citing that 'improved exports do not significantly increase inflationary pressure.' Does this mean the consumption effects from improved exports, such as rising global stock markets and asset effects leading to semiconductor companies' bonuses, are considered minimal?

▲(Lee Ji-ho) It is not that there is no effect on inflation. When exports improve, corporate earnings improve with a time lag. Then corporate earnings transfer to personal income, and it takes time for this to manifest as inflationary pressure. We believe this will not be fully realized within this year.

▲(Park Chang-hyun, Head of Inflation Trends Team) We believe the inflationary pressure from exports is relatively smaller compared to consumption. When exports increase positively, the current account surplus grows, exerting downward pressure on the exchange rate, so the model estimates a smaller effect than consumption.

- Core inflation dropped from the high 3% range in May last year to the low 3% range in June. Since the base effect disappears from June, do you expect core inflation to continue to slow?

▲(Kim Woong) Basically, the base effect on core inflation is small. The trend is a continued slowdown centered on personal services prices. Since monetary policy is still being operated tightly, it acts as downward pressure to reduce inflation.

- You mentioned the inflation rate changed at the second decimal place. Approximately how much did it rise?

▲(Park Chang-hyun) It is slightly lower than 2.65%. Previously it was a low 2.6%, now it can be seen as a high 2.6%. Currently, we do not present forecasts beyond the second decimal place. We hope you understand that this is to provide a concise and clear forecast, similar to most forecasting institutions.

- You said the growth rate is expected to be somewhat adjusted in the second quarter. How much adjustment is anticipated?

▲(Kim Woong) The first quarter growth rate recorded 1.3%. Since a significant portion of the increase is due to temporary factors, it should be adjusted in the second quarter. In the second half, it is expected to return to the originally moderate path. If the previous quarter is high, the next quarter inevitably declines due to the base effect. From the second half onward, it is understood that the improvement trend will continue.

- Geopolitical instability and rising international oil prices were cited as upward inflation factors. The oil price forecast rose from $80 to $85 per barrel in the first half. However, the consumer price forecast remained unchanged. Shouldn't there have been a corresponding adjustment?

▲(Park Chang-hyun) The annual figures consider oil prices, elevated exchange rates, and higher-than-expected growth as upward factors. Downward factors include government inflation measures and declining core inflation. Regarding oil prices, Brent crude was raised by $2 to $85 this year compared to last month, which is a 2.5% increase. This level of upward pressure has already been reflected in the figures.

- You cited improved household real income as the background for the recovery in private consumption. Recent Bank of Korea data suggests that while improved real income is positive for consumption capacity, it does not directly translate into consumption recovery speed. What is your view?

▲(Lee Ji-ho) Although inflation remains uncertain, it is steadily declining, which is expected to support consumption.

- You indicated that consumer price levels will be below 2.5% in the second half. The forecast is 2.4% for the second half and 2.6% annually. Is there a particular reason for specifying these numbers?

▲(Lee Ji-ho) It is expected to be in the high 2% range until the first half and then drop below 2.5% in the second half. This means it will move closer to 2%.

- Earlier, the Governor said the large gap between the forecast and actual GDP in the first quarter is not a failure but common. The upper bound of the growth rate in the previous scenario forecast was 2.3%. Why was it significantly exceeded?

▲(Lee Ji-ho) The difference between the forecast and GDP figures was announced once in February, and after detecting signs in April, it was reflected in the Monetary Policy Committee minutes. Nevertheless, the actual figure was higher than internally expected. This resulted from providing the maximum available information. It is not something we are satisfied with. A task force was formed within the Research Department to discuss how to obtain data quickly. We will strive to produce accurate forecasts to form the basis for monetary policy.

▲(Kim Min-sik, Head of Research Coordination Team) Regarding scenario forecasts, they analyze how the economy would be affected if upside or downside risks of interest to economic agents materialize. In this case, assumptions were made about how global geopolitical conflicts might change. Scenario forecasts do not present the minimum or maximum growth rates of the Korean economy. Please understand them as benchmarks.

- The Governor mentioned extending the fuel tax cut until June as a downward inflation factor. Was this not reflected in the February economic outlook?

▲(Park Chang-hyun) In the February forecast, it was assumed to last until April. After April, it was expected to be gradually adjusted, but now it has been extended to June. It is difficult to specify exactly how much it was raised, but it is known to have acted as some downward pressure.

- The Governor mentioned intensifying 'domestic demand polarization.' What exactly does this mean? You said domestic demand would be adjusted in the second quarter and recover clearly in the second half. Does this mean polarization will worsen?

▲(Lee Ji-ho) Two things are mixed. One is differentiation, the difference in consumption between high- and low-income groups. Looking at sales locations, fast food and buffets are doing well, but mid- to low-priced stores are seeing sales decline, indicating polarization. Currently, domestic demand is not considered strong. However, it has improved significantly compared to the fourth quarter. At present, it is not believed that polarization or differentiation will intensify. The statement means that overall domestic demand will improve if the recovery continues in the second half. It does not mean polarization will worsen as domestic demand improves.

- Government transfer expenditures were cited as a major contributor to first-quarter growth. How much more did they contribute compared to previous years, and what is the growth contribution?

▲(Lee Ji-ho) Government transfer expenditures were already reflected in the previous forecast. However, more was executed in the first quarter than previously assumed, which was more significantly reflected in private consumption.

▲(Kim Woong) On a central government basis, first-quarter transfer expenditures were 151 trillion won. Last year it was 134 trillion won, so it increased by about 17 trillion won. Not all transfer expenditures are reflected in private consumption, but it can be seen as a positive factor for private consumption.

- The second half forecast was presented as 2.4%, and it was said it would fall below 2.5% during the second half. Is the timing of falling below 2.5% delayed, or will it happen around year-end?

▲(Park Chang-hyun) It is forecasted to fall below 2.5% during the second half. It is still expected to approach the low 2% range around the end of this year or early next year.