Morgan Stanley has lowered its 2024 economic growth forecast for South Korea to 1.8% from 2.1%, citing geopolitical conflicts stemming from the Middle East. The global investment bank also projected that two supplementary budgets could be drawn up this year due to the prolonged Middle East war.
Kathleen Oh, Morgan Stanley's chief Korea economist, said in a report on the 7th that "geopolitical conflicts in the Middle East have continued for six weeks, and the global oil market is facing a real supply shortage." She added that "non-semiconductor export recovery is expected to be weak amid deteriorating terms of trade," and announced a 0.3 percentage point cut to Korea's growth forecast from 2.1% to 1.8%.
"Rising inflation driven by high oil prices is expected to slow consumption. Initially, rising oil prices will have an impact, followed by service price increases," Oh said, explaining the background for the downward revision.
Consumer price inflation this year is forecast to rise to 2.4%. Although the government's price controls and fuel price cap policies are in effect, inflation is expected to peak at 2.8% in the second quarter before settling back to around 2.4% in the second half.
"The fuel price cap and fuel tax cut measures are estimated to have suppressed inflationary pressure by approximately 45 basis points as of the first quarter," Oh explained.
Two supplementary budgets could be compiled this year, she forecast. "The first supplementary budget is expected to be swiftly passed on the 10th of this month, boosting growth by approximately 0.15 percentage points," Oh said. "There is also a high possibility that a second supplementary budget will be implemented in the second half, which is expected to provide an additional growth supplement of at least 0.05 to 0.10 percentage points."
Regarding monetary policy, she moved up the timing of the Bank of Korea's rate hikes by three quarters from the previous forecast of mid-2027, projecting increases in the fourth quarter of 2026 and the first quarter of 2027.
"The current policy rate is positioned at the upper end of the neutral rate range, so the degree of tightening is expected to be limited," Oh said. "Through a total of two rate hikes, the terminal rate is expected to reach the 3.0% level."