Global investment bank (IB) Morgan Stanley raised its forecasts for Korea's gross domestic product (GDP) growth for this year and next. The move follows increasing domestic and external demand. It also projected that demand-driven inflation will emerge, with the Bank of Korea's policy rate reaching 3.5 percentage points (P) by the end of the first quarter next year, earlier than expected.
Catherine Oh, Morgan Stanley's chief economist for Korea and Taiwan, said in a report on the 5th titled "Korea: favorable fundamentals" that Korea's GDP growth this year is expected to be 3.4%, up 60 bp (1 bp = 0.01 percentage point) from the previous forecast. For next year, she projected 2.7%, up 40 bp.
External demand (exports) is what drove GDP growth. Morgan Stanley said that while semiconductor exports remain strong, non-semiconductor exports such as automobiles, machinery, and consumer goods have also improved since May, and this trend is expected to accelerate further in the second half of the year. It added, "As technology demand is expected to continue serving as a pillar of growth, economic activity centered on manufacturing and capital expenditures (CapEx) is also gradually gaining momentum."
It also viewed domestic demand positively. The report said, "Consumption is recovering faster than expected on the back of increased household income due to wage growth, strong fiscal support, and wealth effects from rising asset prices," and added, "The inflow of foreign tourists is acting as an additional and increasingly broad-based upside driver for service-sector activity and domestic consumption."
However, it assessed that demand-driven inflationary pressure is becoming increasingly evident. The report said, "Core prices (index excluding food and energy) rose to 2.6% in July, the highest since December 2023, while the consumer price index (CPI) inflation slowed to 2.8%," and analyzed, "This shows that underlying price pressures are strengthening regardless of volatility in supply-side factors." It continued, "Given this environment, we expect the Bank of Korea to maintain its rate-hike cycle at a faster pace than previously expected," and forecast, "It will reach 3.5% by the end of the first quarter next year."