Goldman Sachs lowers Korea's growth outlook to 2.8 percent

In this 2021 July file photo, the Goldman Sachs company logo is seen on the floor of the New York Stock Exchange (NYSE) in New York City, U.S. Reuters-Yonhap

By Lee Kyung-min

Goldman Sachs has revised down Korea's economic growth forecast for this year to 2.8 percent from its previous projection of 3.2 percent, largely on weaker external demand and increasing macroeconomic risks from the Russia-Ukraine conflict. It also revised up Korea's inflation forecast by 0.6 percentage point to 3.6 percent mainly on higher commodity prices.

In a report titled, “Korea Views: Policy Implications of Presidential Election and Our Macro Views,” the global investment banking powerhouse said rising macro risks from the Ukraine conflict will translate into adversely impacting the growth of the oil shock on global and domestic demand.

The report also mentioned that it expects one of the most relevant changes to macro investors would be a relatively conservative fiscal policy stance under the presidency of Yoon Suk-yeol.

“The Yoon presidency is expected to set up fiscal rules within the first year of its term, although details have not been outlined yet and it is unclear whether the introduction will require legislative action. The rules might not differ much from a debt limit of 60 percent of GDP and a deficit limit of 3 percent of GDP that were announced by the finance ministry last year, but the enforcement might happen earlier and could be more binding.”

The Bank of Korea (BOK), it added, is expected to slow down the pace of policy rate hikes.

“Given that the BOK was the first in the region to raise the policy rate in August, and has raised rates by 75 basis points cumulatively over the past six months, we expect the central bank to go for just two 25 basis point hikes for the remainder of this year, most likely in the third and fourth quarter, although the hike timing will depend on decisions of the new central bank leadership, which is likely to be in place before the May Monetary Policy Committee meeting.”

The levels of inflation-adjusted policy rates should be broadly in line with those in other mature economies with high sovereign credit ratings, it said.

“We also continue to expect the pace of policy rate hikes to decelerate in 2023 along with a gradual easing in inflation pressure. We envisage total 50 basis point hikes spread out over the course of 2023, well-coordinated with steady tapering of pandemic support measures, including loan maturity extension and interest deferrals granted for Small and medium-sized businesses.”