Growing 'Fear of R'... OECD Downgrades Korea's Growth Rate from 2.1% to 1.5%

The Organization for Economic Cooperation and Development (OECD) has downgraded South Korea's economic growth rate for this year from 2.1% to 1.5%. This is the result of the global economy falling into a 'zero hour' situation due to US President Donald Trump's tariff policies. There are also diagnoses that the Korean economy needs to pursue structural reforms and diversify supply chains to respond to the new trade environment.

Global Growth Rate Downgraded from 3.3% to 3.1%

In its 'Interim Economic Outlook' report released on the 17th, the OECD projected Korea's growth rate for this year at 1.5%. This is 0.6 percentage points lower than the previous forecast (2.1%) from December last year. The OECD Interim Economic Outlook is released twice a year, in March and September. The OECD's growth forecast is the same as the Bank of Korea (1.5%), but lower than the government (1.8%) and Korea Development Institute (KDI, 1.6%).

This significant cut in Korea's growth rate, which has high export dependency, is interpreted as a result of concerns about global trade wars. The downward adjustment of Korea's growth forecast (0.6 percentage points) was the third largest among the G20 countries, following Mexico (2.5 percentage points) and Canada (1.3 percentage points). Mexico and Canada showed notable downward adjustments as they are directly impacted by US tariff policies. The US announced measures to increase tariff rates on imported goods from Mexico and Canada by 25 percentage points.

The OECD diagnosed that downside risks to the global economy have increased since the Trump administration took office. This is because trade barriers have risen due to tariff impositions, and geopolitical and policy uncertainties have grown. Considering these uncertainties, the OECD downgraded this year's global growth rate from 3.3% to 3.1%, a 0.2 percentage point reduction. The G20 growth rate was also lowered from 3.3% to 3.1%. Growth forecasts for major countries were also downgraded across the board. The US was lowered from 2.4% to 2.2%, the Eurozone from 1.3% to 1.0%, and Japan from 1.5% to 1.1%. The OECD expressed concern that "downward pressure on the global economy will increase due to uncertainties in global trade policy" and that "as households and businesses in each country become more cautious, this will negatively impact investment and consumption."

Korea's growth rate for next year was revised upward from 2.1% to 2.2%. This contrasts with the global growth rate for the same period, which was revised downward from 3.3% to 3.0%. Some analysts suggest this reflects a 'base effect' given the significant downward adjustment for this year.

OECD Warns of High Inflation and Low Growth

While the OECD cut growth forecasts for countries, it raised consumer price forecasts instead. This reflects concerns that import prices will soar as countries impose tariffs one after another due to the trade war. Concerns about slowflation (a situation where high prices continue while growth slows) have increased.

The OECD revised this year's G20 consumer price inflation rate upward by 0.3 percentage points, from 3.5% to 3.8%. For the Eurozone, it was raised from 2.1% to 2.2%. For the US, it was significantly increased by 0.7 percentage points, from 2.1% to 2.8%. The upward adjustment in consumer prices for the US, which is leading the tariff increases, was the highest among G20 countries. Korea's consumer price forecast was revised upward from 1.8% to 1.9%.

The OECD diagnosed that "if the trade war intensifies, it will increase downward pressure on the global economy" and that "the slower pace of interest rate cuts by central banks due to increasing inflationary pressures could also negatively impact economic conditions."

The OECD suggested that countries, including Korea, should diversify their supply chains to respond to global uncertainties. It also recommended removing regulations that hinder fair competition while quickly adopting artificial intelligence (AI) technology across various sectors to boost productivity. In the short term, it advised that central banks should implement monetary policies to curb rising core inflation. Additionally, it emphasized that governments should pay attention to fiscal soundness.

Reporter Kim Ik-hwan lovepen@hankyung.com