Financial Research Institute "Economic Growth Rate Expected to be 2.9% Next Year"

Turning Positive Next Year from Minus 1.2% This Year
Bank Profitability Slightly Deteriorates

Asia Economy DB. Sohn Sang-ho, President of the Korea Institute of Finance, is delivering the opening remarks at the seminar on the future direction of the financial group supervision system held on the 29th at the Bankers' Hall in Jung-gu, Seoul. Photo by Moon Ho-nam munonam@

[Asia Economy Reporter Kim Min-young] Although South Korea's economic growth rate is expected to record a negative figure this year, it is projected to jump to 2.9% next year due to the base effect.

On the afternoon of the 5th, at the '2020 Financial Trends and 2021 Outlook' discussion hosted by the Korea Institute of Finance held at the Bankers' Hall in Jung-gu, Seoul, Park Sung-wook, head of the Macroeconomic Research Office at the Korea Institute of Finance, announced that the Korean economy is expected to contract by 1.2% this year and then grow by 2.9% next year.

Park predicted that due to the impact of the novel coronavirus infection (COVID-19), both domestic demand and exports have been sluggish, causing this year's growth rate to decline, but it will gradually recover next year.

He analyzed, "If vaccine development and distribution progress and accommodative monetary and fiscal policies lead to a recovery in domestic and foreign demand, a rebound centered on exports and investment is possible."

However, the 2.9% growth rate forecast for next year is conditional on COVID-19 being controlled within a limited scope this winter and vaccines being approved early next year and distributed to major countries in the second half of the year.

He added, "Assuming the economy improves from the first half of next year immediately after vaccine approval, the economic growth rate could rise to 3.5%."

Among the GDP components, the private consumption growth rate is expected to rise from -4.5% this year to 2.7% next year. Facility investment is projected to change from 6.1% to 4.0%, construction investment from -1.0% to 1.3%, total exports from -3.9% to 5.8%, and total imports from -4.4% to 4.1%.

Park said, "Facility investment is expected to maintain growth as investment in the semiconductor sector continues and the Korean New Deal policy is promoted," adding, "Construction investment will turn positive as the base effect from large-scale apartment sales in 2015-2016 eases and government social overhead capital (SOC) investment continues."

He also forecasted that the average won-dollar exchange rate next year will be around 1,125 won.

Growth shifts from -1.2% this year to 2.9% next year

There was also a forecast that the stock market will show a trend similar to the second half of this year. Lim Hyung-joon, head of the Capital Research Office at the Korea Institute of Finance, said, "Next year's financial market will be stable in terms of interest rates and stock prices, but if corporate earnings fall short of expectations, market conditions could deteriorate," adding, "The stock market is expected to maintain a price level similar to the second half of this year, with little possibility of sharp fluctuations."

Seo Byung-ho, head of the Banking and Insurance Research Office 2 at the Korea Institute of Finance, said in 'Changes and Outlook of the Banking Industry Environment' that "Next year, the growth rate of domestic banks' loan assets will be slightly lower than this year's 10%, around 6%."

He continued, "Next year, domestic banks' profitability is expected to decline to a return on assets (ROA) level of 0.3 to 0.365 due to increased loan loss provisions from the prolonged COVID-19 crisis and contraction in fee-related operations."

It was diagnosed that the non-bank sector, including insurance and savings banks, is in a situation where efforts to secure future competitiveness are urgently needed amid macro-financial environments such as economic changes due to COVID-19 and prolonged ultra-low interest rates, which limit growth and profitability.

The Korea Institute of Finance cited opportunities in the insurance industry such as new revenue sources and insurance demand creation through digitalization, new growth areas and alternative investment opportunities arising from pandemics and the Green New Deal policy, while risks include a decrease in new insurance subscriptions, an increase in cancellations due to loss of validity of existing contracts, expansion of negative margins due to prolonged ultra-low interest rates, and increased capital adequacy burdens.

This content was produced with the assistance of AI translation services.