(Bloomberg) – South Korea’s government lowered its economic growth forecast for this year to below the central bank’s outlook and raised its inflation estimate upwards, underscoring growing challenges for policymakers .
The Ministry of Finance now sees gross domestic product growing by 2.6% and consumer prices rising by 4.7% in 2022, a deterioration from 3.1% and 2.2% previously, according to a press release. . That compares with the Bank of Korea’s forecast last month of a 2.7% expansion and 4.5% inflation.
Countries around the world are grappling with weaker economic growth and soaring consumer prices, with the World Bank warning last week of a risk of stagflation. Russia’s war on Ukraine and virus lockdowns in China are driving up energy, food and commodity prices, weighing on household spending and business activity.
South Korea posted its first current account deficit in two years in April as rising energy and commodity prices pushed up the cost of imports. The export-dependent economy has run trade deficits for most of the past five months, with shipments in the first 10 days of June producing another shortfall.
Central banks viewed inflation as the biggest threat to their economies. BOK Governor Rhee Chang-yong signaled that another interest rate hike is likely next month, stressing the importance of containing price pressures. The Federal Reserve raised rates by 75 basis points this week as inflation remains well above 8% in the world’s largest economy.
Consumer prices in South Korea rose 5.4% in May, the fastest pace since 2008, and the central bank expects it to remain within the 5% range until the month next.
While the economy is expected to grow this year at a slower pace than the government’s previous forecast, the Department of Finance expects employment to rise by 600,000. That’s more than double its previous estimate. of 280,000, reflecting the risk dissipation of the omicron variant.
The country’s current account is likely to end the year with a surplus of $45 billion, against a previous forecast of $80 billion, the ministry said, pointing to the sharp rise in oil prices and the rise in the number of Koreans traveling abroad.
The economy grew 4.1% last year, rebounding faster than most developed countries. Policymakers remain hopeful that exports will continue to support growth, while consumption will pick up as new virus restrictions are lifted.
In 2023, the economy is likely to grow by 2.5% with inflation dropping to 3%, the ministry said.
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