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The International Monetary Fund’s online forum IMFBlog

The International Monetary Fund (IMF) has raised its projection for South Korea’s economic growth rate this year to 4.3%, 0.7 points higher than its April projection of 3.6%. Considering that it raised its growth projections for advanced economies by an average of 0.5 points, the IMF appears to have concluded that Korea is recovering faster than other advanced economies.

One caveat is that the IMF’s revision accounts for Korea’s second supplementary budget, which was recently finalized, but not for the fourth wave of COVID-19 that Korea is currently facing.

In its World Economic Outlook Update, published on Tuesday, the IMF predicted that the global economy’s growth rate this year would be 6.0%, the same as in April. But it now expects a wider gap between advanced and emerging economies.

The IMF’s prediction for South Korea is 4.3% this year and 3.4% next year. That exceeded the forecasts of the Korean government (4.2%) as well as major organizations, including the Organisation for Economic Co-operation and Development (3.8%), the Bank of Korea (4.0%), the Asian Development Bank (4.0%), and the Korea Development Institute (3.8%).

The International Monetary Fund’s latest World Economic Outlook Update upped South Korea’s economic growth rate this year from 3.6% to 4.3%.

Among the big three credit rating agencies, the IMF’s forecast was lower than Fitch (4.5%) but higher than the S&P (4.0%) or Moody’s (3.5%).

The IMF also raised its growth rate projections for other major advanced economies. The US saw an increase from 6.4% to 7.0% (up 0.6 points), the UK from 5.3% to 7.0%, and Canada from 5.0% to 6.3%.

The IMF’s average projection for yearly growth across advanced economies rose 0.5 points, from 5.1% to 5.6%, even as its projections declined for a fair number of emerging economies. China’s rate declined from 8.4% to 8.1%, and India’s rate dropped from 12.5% to 9.5%.

“The global economic recovery continues, but with a widening gap between advanced economies and many emerging market and developing economies,” wrote Gita Gopinath, the IMF’s chief economist.

“Growth prospects for advanced economies this year have improved by 0.5 percentage point, but this is offset exactly by a downward revision for emerging market and developing economies.”

The primary reason for this widening gap is different rates of COVID-19 vaccination.

“Close to 40 percent of the population in advanced economies has been fully vaccinated, compared with 11 percent in emerging market economies,” Gopinath noted.

“Faster-than-expected vaccination rates and return to normalcy have led to upgrades, while lack of access to vaccines and renewed waves of COVID-19 cases in some countries, notably India, have led to downgrades,” she said, referring to the IMF’s lower projections for emerging economies.

Additional fiscal expenditures by South Korea, the US, and the EU both this year and last also had an impact on the IMF’s projection.

But Gopinath downplayed concerns about inflation, writing, “In most advanced economies inflation is expected to subside to pre-pandemic ranges in 2022.”

In support of that contention, she mentioned the base effect of the pandemic-caused downturn in travel and service sector activity last year and noted that the employment rate is still below its pre-pandemic level.

Gopinath noted that there are still factors that could cause inflation, including an undersupply of raw materials and the potential for higher housing prices.

The IMF economist recommended that governments in various countries maintain expansionary fiscal and monetary policies.

Gopinath called for “prioritizing health spending, including for vaccinations, and targeted support for affected households and firms.” She also spoke of the importance of “broader fiscal and monetary support including remedial measures to reverse the loss in education, and supporting the reallocation of labor and capital” through subsidies.

“Fiscal actions should be nested within a credible medium-term fiscal framework to ensure debt remains sustainable. For many countries this will involve improving tax capacity [and] increasing tax progressivity,” she added.

South Korea’s Ministry of Economy and Finance released a statement Tuesday about the IMF’s adjustment of the growth rate.

“The upgrade of this year’s growth rate (0.7 percentage points) was not only higher than the average among advanced economies (0.5 points) but also higher than all but two countries in the Group of Seven, the UK and Canada. After minimizing the impact of COVID-19 last year, Korea is expected to recover faster than the major advanced economies this year,” the Ministry said.

By Lee Jeong-hun, staff reporter

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