OECD downgrades Korea's growth forecast to 1.5 percent

Containers stacked up at a port in Incheon on April 14. [NEWS1]

The Organization for Economic Cooperation and Development (OECD) revised down Korea’s growth forecast to 1.5 percent for this year, citing high interest rates and the weak housing market.

The OECD slashed Korea's projected growth by 0.1 percentage points from the March projection. The IMF had already slashed the outlook in March from 1.8 percent forecast made in November. It also cut next year’s forecast to 2.1 percent, down 0.2 percentage points from the previous projection.

“Exports are set to pick up with China’s recovery,” said the OECD in a report. “Elevated debt servicing burdens and sluggish housing market will continue to weigh on private consumption and investment in the short term, but demand growth should strengthen in 2024.”

The collapse of global banks, like the Silicon Valley Bank in March, has had a limited impact on Korea’s banking industry. But it may expand volatility in Korea’s financial market and raise household debt if global financial uncertainties rise.

The Bank of Korea’s decision to hold the rate steady at 3.5 percent since January was appropriate, said the OECD. “The policy rate is assumed to remain at the current level until the second half of 2024.”

The OECD forecast is higher than the 1.4 percent projected by the Bank of Korea last month.

The OECD revised down Korea’s inflation forecast for this year by 0.2 percentage points to 3.4 percent. It raised the figure for next year to 2.6 percent, up 0.2 percentage points.

“Inflation will continue to decline, but only moderately, with utilities and services price adjustments yet to come,” it added.

Korea’s consumer prices slowed to 3.3 percent in May, the lowest since reaching the peak of 6.8 percent in July. But core inflation, excluding volatile food and energy prices, remained strong at 3.9 percent.

The OECD advised Korea to proceed with fiscal consolidation against the backdrop of a rapidly aging population, noting pension reform and a fiscal rule to limit the fiscal deficit to three percent of GDP.

The OECD also proposed that the government specifically target vulnerable groups more directly and enhance incentives for energy savings instead of temporarily offering a tax cut on fuel.

Other policy actions it proposed for tackling structural challenges include stepping up training and activation policies for individuals who lose their job, expanding after-school care and increasing public financing of parental leave to boost female employment and fertility.

The OECD revised up global economic growth by 0.1 percentage points to 2.7 percent and kept the forecast steady for next year at 2.9 percent.

The figure was higher than the World Bank’s 2.1 percent projection made Tuesday.

The Washington-based bank revised up the growth forecast by 0.4 percent points from January, citing the recovery of economic activities in China and U.S. consumer spending.

BY JIN MIN-JI [jin.minji@joongang.co.kr]