IMF lowers Korea's growth rate for four consecutive times

The International Monetary Fund (IMF) lowered its forecast for Korea's economic growth this year by 0.2 percentage points to 1.5 percent. It is the fourth consecutive downward revision following July and October of last year and January of this year. The slowed recovery of the global economy, including China, and unstable financial markets in advanced countries are the reasons for the worsening outlook for the Korean economy. Under these circumstances, the Bank of Korea froze the base rate at 3.5% twice in a row, and it is more likely to lower this year's growth rate forecast at 1.6%.

On Tuesday, the IMF cut its global economic growth forecast for this year from 2.9% to 2.8%, and Korea from 1.7% to 1.5%. Of the 10 largest economies, only Korea, Japan, and Germany have seen four consecutive declines in forecasts. This is because the economic shock caused by sluggish consumption in developed countries following austerity measures and disruption of international supply chains have been concentrated in manufacturing and export powerhouses. On the other hand, growth forecasts for the U.S. and the U.K. have been raised, while China's 5.2% forecast was maintained.

The Bank of Korea's interest rate freeze also reflects this situation at home and abroad. Behind the BOK's decision, although the rate of increase in consumer prices in Korea last month was still high at 4.2%, and oil prices became unstable again due to OPEC's surprise production cut, they believed that it was more urgent to deal with economic recession and financial instability than price stability. In addition, the South Korean central bank that the growth rate this year would be slightly below the 1.6% forecast made in February. This means that the belief that the first half of the domestic economy is bad but the second half is good, which the government and the Bank of Korea have been expecting, is more likely to prove wrong.

The 3% base rate, which has continued for the past seven months, is creating shock waves across the economy. Due to soaring interest rates, 66% of domestic manufacturers have turned red or are at breakeven. The closure of self-employed and small business owners with debts of 10 to 20 trillion won is also on the rise. Financial risks, such as the rapid increase in real estate project financing (PF) delinquency rates, are also growing. Tuesday's 1.42% rise in the KOSPI is due to expectations that the interest rate freeze will ease such a burden a little.

However, it seems premature to think that there will be no further rate hikes. If the U.S. Federal Reserve's interest rate hike next month exacerbates concerns about foreign capital outflows or if international oil prices fluctuate, the BOK has no choice but to raise interest rates again. It is for this reason that the BOK governor said, "The market's expectations of a rate cut by the year-end are out of reason." It is difficult to expect a sharp turnaround in a situation where exports of key industries are drastically contracting and growth rates are declining. Households and businesses, the government, and the BOK should brace for the extended recession while avoid becoming impatient.