Concerns about stagflation (rising prices amid economic downturn) are growing as President Donald Trump's tariff policy has led to a negative growth rate in the United States for the first quarter and a downgrade in the national credit rating. With fears of a slowdown in the U.S. economy, Korea's growth outlook is also looking challenging.
◇ Moody's downgrades U.S. credit rating for the first time in 108 years
According to the financial sector on the 23rd, the global credit rating agency Moody's downgraded the United States' national credit rating (long-term issuer rating) from the highest grade of Aaa to Aa1 on the 17th. Moody's had maintained this rating for 108 years since it assigned Aaa during World War I when the U.S. government issued government bonds, marking the first time it has lowered the rating.
Moody's is not the only agency that has downgraded the U.S. credit rating. Earlier, Standard & Poor's (S&P) downgraded the rating from AAA to AA+ in August 2011, and Fitch did so similarly in August 2023. With Moody's joining in, all three major global credit rating agencies have revoked the United States' highest credit rating.
The background to the credit rating downgrade lies in the massive fiscal deficit. Moody's noted, "Irresponsible expenditures by the U.S. government and Congress have been contributing to the growth of the fiscal deficit," adding, "While we recognize the strengths of the U.S. economy and finance, they cannot fully offset the deterioration of fiscal indicators." Previously, S&P and Fitch also cited the decline in U.S. fiscal soundness as the main reason for the credit rating downgrade.
This decision is likely to further increase market concerns about U.S. stagflation. The recently reported growth rate of real gross domestic product (GDP) in the United States for the first quarter recorded -0.3% (annualized), marking a return to negative growth after three years. During the same period, the University of Michigan's expected inflation rate for the U.S. jumped from 6.5% in April to 7.3% in May, bringing the possibility of stagflation closer to reality.
The Federal Reserve (Fed) is also hinting at the potential for stagflation. Following the decision to hold the benchmark interest rate on the 7th, the Fed stated, "Uncertainty about the economic outlook has increased," and assessed that "the risks of higher unemployment and inflation have worsened."
In response, Jason Pride, chief investment strategist at Glenmede, interpreted that the Fed has "officially stated that stagflation pressure is a core challenge for them." Peter Cretz, chief economist at Spartan Capital Securities, also evaluated it as a hint from the Fed regarding stagflation and tariff-related uncertainties.
◇ Impact on Korean economy unavoidable... concerns over sluggish exports and delayed interest rate cuts
If concerns about U.S. stagflation become serious, the Korean economy will inevitably be affected. According to the Korea Trade Association, the United States was Korea's second-largest trading partner last year, accounting for 18.7% of total exports. If the U.S. economy falls into recession, consumer and investment demand will decrease, leading to a decline in Korea's exports. In particular, poor sales in sectors such as semiconductors, automobiles, and electronics, which are highly dependent on the U.S., are unavoidable.
Rising prices in the United States may also delay the Bank of Korea's interest rate cuts by compelling the Fed to maintain high interest rates. Currently, the interest rate gap between Korea and the U.S. is 1.75 percentage points (upper limit basis, Korea 2.75% and the U.S. 4.5%). If the Bank of Korea lowers rates during the Monetary Policy Committee meeting on the 28th, this gap could expand to 2 percentage points. An expanded gap in benchmark interest rates could lead to the outflow of foreign investment funds, resulting in a weaker won and a drop in stock prices.
Economic indicators are already flashing warning signs. On the 24th of last month, the Bank of Korea reported that the GDP growth rate for the first quarter of this year (compared to the previous quarter) recorded -0.2%, indicating a contraction after three consecutive quarters of growth. This figure is 0.4 percentage points lower than the official forecast of 0.2% made by the Bank of Korea in February. Exports, which have been supporting the economy, fell by 1.1%, and construction investment decreased by 3.2%. With the additional shock from U.S. stagflation, a slowdown in growth is expected to become more pronounced.
The government currently sees the impact of the U.S. credit rating downgrade on the domestic economy as limited. Deputy Minister Yoon In-dae of the Ministry of Economy and Finance recently assessed in an annual meeting with the Bank of Korea, Financial Services Commission, and Financial Supervisory Service that the downgrade by Moody's was "somewhat anticipated" and that “the impact on the market will likely be limited."
However, experts believe that, with issues such as U.S. tariff negotiations still lingering, the possibility of stagflation cannot be completely ruled out. Economist Gong Dong-rak from Daishin Securities noted, "The downgrade of the U.S. credit rating has not significantly increased market interest rate volatility," but added, "However, since tariff risks still remain, this is not a stage where we can be completely reassured."