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A trader talks into a headset on the floor of the New York Stock Exchange in New York, US, on June 30. (Reuters/Yonhap News)

Projections for the growth rate of the US economy in the second quarter were lowered considerably only a few days after being posted, making the looming prospect of an economic recession appear ever more likely.

The adjustment has prompted concerns that it will be even harder to tighten monetary policy without triggering a hard landing that would almost certainly leave a mark on the South Korean economy.

According to materials released by the Federal Reserve Bank of Atlanta on Sunday, the bank’s GDPNow economic model adjusted the projected rate at which the US economy will grow in the second quarter to -2.1%. This is the second time the bank has lowered its projection, after adjusting it from 0.7% on June 28 to -1.0% on June 30.

The US posted a growth rate of -1.6% in the first quarter of this year. An economic recession is generally defined as two consecutive quarters of negative growth.

On the same day, investment bank JP Morgan Chase revised its projection for the US’ growth rate in the second quarter from 2.5% to 1.0%.

That downgrade reflected a considerable slowdown in business. The US Institute of Supply Management reported a purchasing managers’ index for the manufacturing industry of 53.0 in June. That’s the lowest level since June 2020 (52.4), showing just how bad economic sentiment is in the industry.

On the same day, the US Department of Commerce said that construction spending in May had declined 0.1% from the previous month.

All that makes it likely that Korea’s economic growth rate will be lower than previously forecasted.

In its revised economic projections in May, the Bank of Korea said that Korea would post a GDP growth rate of 2.7% for the year. But those calculations assumed a US growth rate of 2.9%. Back in mid-June, the US Federal Reserve lowered its growth rate projection for the year to 1.7%.

“Our projections are that the US’ growth trend will slow considerably since economic activity has been rapidly faltering since May. Major institutions predict that [the US’ growth rate] next year will fall to its potential growth rate,” the Bank of Korea said in a report published on Sunday.

“We need to prepare preemptively for the possibility that a shock originating overseas will go beyond the price of goods and the financial market to the real economy, including exports and investment, given our economy’s characteristic reliance on foreign trade,” said Minister of Economy and Finance Choo Kyung-ho in an emergency meeting of economic ministers Sunday.

Eyes are turning to the Fed’s next steps. While the Fed has maintained that a softish landing is possible, the economic forecast is gradually becoming bleaker.

If prices don’t stabilize and the Fed adopts a tougher contractionary policy in the second half of the year, the impact is expected to be substantial. Factors reinforcing that negative forecast are continuing supply disruptions resulting from the war in Ukraine and China’s “zero-COVID” policy, as well as the fact that expected inflation rates, both in the short and long term, remain high.

“If insecurity about the price of goods spreads while expected inflation coalesces at a high level, preventing that will necessitate an intense degree of monetary tightening. That’s also expected to have a major knock-on effect on employment and growth,” the Bank of Korea said.

In a report published on Tuesday, the US Congressional Research Service mentioned the possibility of a “double-dip recession,” with the economy reverting to recession following a previous downturn in 2020.

When the inflation rate is high and the Fed is raising rates, as it is right now, a hard landing is more typical than a soft one, the CRS said. The report also mentioned stagflation, considering that the correlation between inflation and the unemployment rate weakens when expected inflation remains stubbornly high.

Others are concerned that market uncertainty over monetary policy has increased. Market projections have recently been out of step with the Fed’s course on interest rates.

While the market expects the Fed to begin lowering the benchmark rate next year, the Fed’s “dot plot” released last month predicted the rate will start to fall in 2024.

“We’re seeing the possibility of a crisis in confidence about Fed policy in the market,” said the Bank of Korea.

By Lee Jae-yeon, staff reporter

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