À̹ÌÁö È®´ë Bank of Korea¡¯s Gov. Lee Ju-yeol speaks during a parliamentary committee meeting on Aug. 22, 2019. [Photo by Lee Seung-hwan]
South Korea¡¯s central bank chief shot down the scenario of a looming recession in the United States from the recent debt market movement, perceiving the U.S. economy to still be on ¡°solid¡± footing.
¡°The background and causes behind the current yield inversions and those in the past are different,¡± Lee Ju-yeol, governor of Bank of Korea (BOK), said in a financial policy briefing before the National Assembly on Thursday.
He said past inversions were caused by the U.S. Federal Reserve¡¯s policy rate hikes as part of a monetary tightening drive, which ended up raising short-term rates while lowering longer-term yields.
But the Fed has now taken an accommodative stance, he noted.
¡°The U.S. economy is not yet in a state to worry about recession as it is still pretty solid,¡± he said. ¡°We can¡¯t completely rule out its possibility but we also can¡¯t conclude that an inverted curve would inevitably lead to a recession.¡±
He said economic institutions have put the risk of a recession occurring at around 30 percent.
U.S. stocks tumbled after the bond market flashed fresh warning signs of an imminent recession. The yield on the 10-year Treasury note brushed below two-year yields on Wednesday, following a similar move last week.
An inversion in the yield curve has often been considered a strong harbinger of recession. Data shows that the curve inverted about 14 months before each of the past nine recessions in the U.S. economy.
Despite a record economic expansion and very low unemployment, the U.S. economy has been battling fears of a possible slowdown. Last month, the Fed trimmed rates by a quarter percentage point – its first cut since 2008 – citing risks from sluggish growth overseas and soft inflation.
U.S. gross domestic product (GDP) slowed to 2.1 percent in the second quarter, down from the first quarter¡¯s 3.1 percent and the weakest increase since President Donald Trump took office in January 2017.
Recession is generally defined as two consecutive quarters of negative GDP growth.
A slowing U.S. economy would put a further strain on Korea, which is grappling with its own trade tensions and lackluster growth at home.
Asia¡¯s fourth-largest economy expanded 2.1 percent in the April-June period, jumping back from the previous quarter¡¯s surprise contraction on the back of heavy government spending.
Last month, the BOK delivered its first rate cut in three years and further slashed its 2019 growth forecast to a decade low of 2.2 percent from the previous 2.5 percent.
Korea¡¯s economy, battered by the trade war between the world¡¯s two largest economies, took a further hit when Japan in July curbed exports of materials critical to Korea¡¯s chip sector and later stripped the country of its fast-track export status over a decades-old dispute dating back to Japan¡¯s colonial past.
Lee said the bank¡¯s 2.2-percent growth estimate for this year had not factored in the fallout from Japan¡¯s trade restrictions. But he added that while conditions have deteriorated, they are ¡°not enough to warrant a change in the forecast data.¡±
Still, he cautioned that the growth target would not be easy to reach ¡°if the situation becomes even more severe and exports and facility investment sink further.¡±
As for hints on the monetary policy direction, he reiterated that ¡°(a rate cut) would definitely be considered if macroeconomic conditions worsen.¡± The next rate-setting meeting is scheduled for August 30.
By Kim Yeon-joo and Kim Hyo-jin
[¨Ï Pulse by Maeil Business Newspaper & mk.co.kr, All rights reserved]