The Organization for Economic Cooperation and Development (OECD) on the 3rd raised its forecast for Korea's economic growth this year to 2.6% from 1.7%. Among the Group of 20 (G20) countries that released growth outlooks, it was the biggest increase (0.9 percentage point). The OECD also estimated that this year's nominal growth rate, reflecting inflation, will reach 10.4%. If realized, it would top 10% for the first time since 2002 (11.0%).
The OECD outlook is the same level as the one the Bank of Korea released last month. It is higher than the Korea Development Institute (KDI; 2.5%) and the International Monetary Fund (IMF; 1.9%).
◇ "Demand for advanced semiconductors stronger than expected"
The OECD releases its global economic outlook four times a year. In March, considering the impact of the Middle East war, the OECD lowered Korea's growth forecast to 1.7% from 2.1%. But in just three months it raised it sharply to 2.6% from 1.7%. This appears to reflect the first-quarter real gross domestic product (GDP) released in April, which grew 1.7% from the previous quarter, the biggest increase in five years and six months.
The OECD said "demand for advanced semiconductors is stronger than expected." It added that "expanding exports, including semiconductors, will drive growth and private investment, and consumption will also gradually recover." The OECD said that in making this forecast it assumed the Bank of Korea would raise the benchmark rate once from the current 2.5% per year.
Meanwhile, the OECD lowered this year's global economic growth forecast to 2.8% from 2.9%. The OECD said "the global economy is under pressure from factors such as a spike in energy prices and trade disruptions due to the closure of the Strait of Hormuz." It also lowered Australia's growth outlook to 1.9% from 2.3%, and Japan's to 0.6% from 0.9%.
◇ "Nominal growth seen at 10.4%... liability ratio revised down"
The OECD estimated Korea's nominal growth rate this year at 10.4%. The nominal growth rate is the sum of the real growth rate and the GDP deflator, an inflation gauge. Last year's nominal growth rate was 4.2%.
The nominal growth rate becomes the denominator when calculating the government liability ratio. Thus, when the nominal growth rate rises, the government liability ratio falls. It also means conditions remain in place for the government to pursue expansionary fiscal policy. The OECD revised down this year's forecast for the government liability ratio to GDP in Korea to 48.2% from 52%.
The OECD lowered next year's growth outlook for Korea to 1.9% from 2.1%, citing base effects from this year's high growth. It also cut this year's consumer price inflation forecast to 2.6% from 2.7% and raised next year's to 2.2% from 2.0%.
◇ "Fiscal deficit surging... phased abolition of oil price cap, etc."
The OECD recommended that "government fiscal policy should be focused on vulnerable households and corporations." It said Korea's fiscal deficit has been surging for years, and with an aging population, expenditure is bound to increase further.
The OECD said "the oil price cap, fuel tax cuts, and export control measures should be phased out." It added that "measures are needed to ease long-term fiscal pressures." It also said "currency policy should take into account energy supply shocks, and a large rate hike may be needed to anchor long-term inflation expectations."