S&P raises Korea's growth outlook for 2021 to 4%

Credit ratings agency S&P Global Ratings revised South Korea’s economic growth outlook for 2021 by 0.4 percentage point to 4 percent Wednesday.

The revision comes six months after the agency projected the Asia’s fourth-largest economy to grow 3.6 percent in January, which was then deemed more optimistic than the government’s projection.

“We’ve always been optimistic about Korea’s recovery prospect. This year, we see a growth of 4 percent and next year at 2.8 percent,” Shaun Roache, chief economist for Asia-Pacific at S&P Global Ratings, told reporters in a virtual press conference on Wednesday.

This reflects an anticipation for the economies across the Asia-Pacific region to reopen, as vaccination efforts are picking up speed.

While economic activities are still below the level of what it used to be before the coronavirus pandemic, there is room for the above-trend growth once economies reopen in Korea and abroad.

“We should expect Asia and Korea to grow quicker than normal for some time,” Roache said. “Asia is still 5 percent below its pre-pandemic trend. Korea is still 2 percent below the pre-pandemic trend. We should see growth faster than normal this year and next year.”

In line with the economic rebound in the post-COVID era, the Bank of Korea, the nation’s central bank, is expected to raise its base rate in a normalization move. Korea’s base rate has remained at 0.5 percent since May 2020.

“We expect the Bank of Korea to raise the rate before end this year. and a couple of times in 2022,” he said. “We don’t think that interest rates will rise too much higher than around 1.25 percent.”

Inflation pressures in Korea, on the other hand, will be mostly temporary and fade next year as the recent surge in consumer prices has been limited to durable goods due to pent-up demand.

“A lot of the inflation that we are seeing there is driven by ‘COVID spending’ where we, for example in Korea, see private spending still below pre-COVID levels, and spending by Korean households on durable goods like washing machines, cars and computers is 25 percent higher than normal,” he said.

Roache added that household consumptions must improve to sustain the economic recovery, as private consumption remains soft across the region including Korea.

This contrasted against a sharp rebound in exports, as well as a gradual increase in public consumption and investment, since the outbreak of the COVID-19 pandemic, according to an estimate by CEIC and S&P Global Economics.

“The constraints on the recovery across Asia, including China, Japan and Korea, remain private consumption,” Roache said.

“We see exports strong, we expect that to continue. Investment and manufacturing is picking up. But spending by household remains weak. This needs to change if recoveries are to be sustainable.”

The latest figure is in line with the upward revision of Korea’s economic growth outlook for 2021. Moody’s Investors Service revised its outlook to 3.5 percent in May, up 0.4 percentage point from an earlier projection in February.

Also in May, the BOK raised the outlook by 1 percentage point to 4 percent. The International Monetary Fund’s projection was revised to 3.6 percent in March, up from 3.1 percent in January.

By Son Ji-hyoung (consnow@heraldcorp.com)