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OECD ups 2022 Korea growth forecast to 2.8 percent

Published: 19 Sep. 2022, 17:31 Updated: 19 Sep. 2022, 18:24

A supermarket in Seoul. Inflation is considered to be a major headwind to Korea's economic recovery, according to a survey by the OECD. [YONHAP]

The OECD upped its forecast for 2022 economic growth in Korea to 2.8 percent from the 2.7 percent estimate issued in June.

Its forecast for 2023 was lowered to 2.2 percent from the earlier 2.5 percent.

In a report released Monday, the OECD noted Korea's "skillful" management during the Covid-19 pandemic, which helped it achieve the smallest contraction in 2020 among OECD countries and a strong rebound in 2021.

It added that the war between Russia and Ukraine had a limited effect and that the recovery continues helped along by "additional" fiscal stimulus by the Yoon Suk-yeol government.

The OECD report said the government's lifting of social distancing restrictions allowed consumer spending to increase, helping to boost service spending even as the Omicron wave swept over the country and global supply chains were disrupted.

While it projected the recovery to continue, it also noted that the speed of recovery will be slow.

"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 report noted. "Inflation is set to remain elevated based on the assumption that global oil prices remain around current levels throughout 2023."

Consumer prices will increase 5.2 percent this year and 3.9 percent in 2023, the OECD projects

The latest projections on consumer prices was 0.4 percentage points higher than the outlook in June for this year and 0.1 percentage points higher for next year.

The Korean government in June projected this year's consumer prices to rise 4.7 percent, while the Bank of Korea in August revised its outlook from 4.5 percent to 5.2 percent.

"Even though fluctuations are considerably less severe than what has been seen during periods of strong currency movements in the past, the weakening will compound inflationary pressures from higher import prices going forward," the OECD report noted.

The government has warned against the hoarding of dollars, while the possibility of Yoon requesting a dollar swap agreement when he meets President Joe Biden later this week in New York has been mentioned by the government.

One of the key issues that the OECD report raised was the need for effective fiscal policies, especially in the face of inflationary pressure.

"Support measures should, as far as possible, be deployed in ways that do not exacerbate ongoing price pressures, to help the central bank contain inflation," the OECD report stated.

It especially noted the need to scale back support for SMEs with chronically low productivity and instead use funds for "people and business dynamism."

"Monetary policy should continue to move towards a less accommodative stance," the OECD report suggested. "Boosting competition by streamlining regulations and reducing and redesigning support that keeps low-productivity SME alive are key to reduce gaps in productivity and living standards."

BY LEE HO-JEONG [[email protected]]