KDI "Korean Economy Expected to Grow 4.1% This Year and 3.2% Next Year"

"COVID-19 Shock Will Recover, but Downside Growth Risks Will Increase"

2022 Major Economic Indicators Forecast

[Asia Economy Reporter Park Sun-mi] It has been forecasted that the South Korean economy will grow by 4.1% this year and 3.2% next year, with an increased downside risk to growth. Factors such as high inflation, reduced monetary policy easing, and market instability due to elevated asset prices and debt levels are downside risks to growth.

On the 8th, the Korea Institute of Finance presented economic growth forecasts of 4.1% for this year and 3.2% for next year at the '2021 Financial Trends and 2022 Outlook Seminar.' Park Sung-wook, head of the Macroeconomic Research Office, explained that the lower growth forecast for 2022 compared to this year is due to "expectations of solid demand recovery from expanded vaccination in South Korea and emerging markets, but prolonged global inflation, reduced easing policies in South Korea and major countries, and financial imbalances caused by elevated asset prices and rapidly increased debt levels will constrain the recovery."

The private consumption growth rate is expected to be 3.4% this year and 3.5% next year. With the vaccination completion rate recently surpassing 70%, a clear improvement in consumer sentiment indices, and the policy shift to With-Corona, private consumption recovery is expected to continue through 2022.

The annual consumer price inflation rate is projected to rise to 2.3% in 2021 and then settle at the inflation target level of 2.0% in 2022. During the first half of 2022, supply-side factors will continue to influence prices, and demand-side factors from economic recovery will push inflation above 2%. However, in the second half, easing supply bottlenecks and base effects are expected to gradually lower inflation to the mid-1% range.

The employment rate is forecasted to gradually increase to 60.4% in 2021 and 60.7% in 2022, following economic recovery. However, insufficient employment recovery among women and youth leaves open the possibility that the scars from the COVID-19 shock will remain for a considerable period. The average annual yield on 3-year government bonds is expected to be around 1.4% this year and 1.8% next year, while the average 2022 won-dollar exchange rate is forecasted to be slightly lower at about 1,135 won compared to 1,145 won this year.

Park advised that COVID-19 response policies should be gradually normalized in line with the degree of economic recovery, while paying close attention to the expanded downside risks.

He said, "Monetary policy should gradually reduce easing in line with economic improvement, but communication with the market should be strengthened to alleviate uncertainties about the schedule for monetary policy normalization that may arise from two upcoming elections and changes in the Monetary Policy Committee composition." He added, "Fiscal policy should actively support the recovery of vulnerable sectors affected by COVID-19 through selective and focused measures, while gradually scaling back COVID-19 support policies according to the recovery level of each economic sector, shifting the policy focus from overcoming the infectious disease crisis to future preparedness."

Furthermore, he advised, "To prevent household debt from becoming a systemic risk factor during periods of rising interest rates, the pace of increase should be controlled under the principles of loans within repayment capacity and suppression of speculative loans, while seeking flexible management measures that can harmonize with housing supply promotion policies."

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