"South Korea's Economic Growth Rate Forecasted at 2.9% Next Year... Base Effects Decrease and Export Growth Weakens"

[Asia Economy Reporter Jeong Hyunjin] The Korea Economic Research Institute under the Federation of Korean Industries forecasted this year's economic growth rate at 3.9% and next year's at 2.9%, the level before the COVID-19 outbreak in 2018. It is expected to be difficult to record a growth rate in the 3% range next year due to the disappearance of the base effect from the economic recovery after the COVID-19 crisis, the impact of the spread of COVID-19 variants such as Omicron, and the weakening export growth trend.

On the 22nd, KERI announced this in its report "KERI Economic Trends and Outlook: Q4 2021." Despite strong exports, KERI predicted that this year's economic growth rate would fall short of 4.0%, reaching 3.9%, as the prolonged fourth wave of COVID-19 and a weakening domestic economic recovery in the second half of the year weigh on the economy.

Next year, the base effect of economic recovery will disappear, and export growth will weaken due to China's economic slowdown, causing the economic growth rate to return to the 2% range. With the recent intensification of COVID-19 cases, the response to the situation will be a major variable for economic growth in the first half of next year. KERI assessed that due to the prolonged deterioration of economic conditions and reduced policy support capacity, a growth rate at the 3% level is unlikely. Accordingly, the first half of next year is expected to grow by 2.8%, the second half by 3.0%, resulting in an annual average growth rate of 2.9%.

Private consumption, which accounts for the largest share of the domestic demand sector next year, is expected to grow by 3.1%, reflecting a recovery that remains insufficient. Private consumption showed a temporary rebound due to economic recovery and government stimulus efforts but has again shown signs of contraction as COVID-19 cases continue. Structural factors such as the burden of household debt principal and interest repayments exacerbated by interest rate hikes, rent increases due to soaring jeonse and monthly rents, as well as direct impacts like reduced income for self-employed individuals, are expected to limit the recovery of private consumption.

Facility investment is projected to grow by 2.7%, driven by aggressive investments in the semiconductor sector and expanded investments in new growth industries. Construction investment, which has continued to lag due to the government's strong real estate suppression policies, is expected to turn positive from -0.5% this year to 2.5% next year, supported by increases in government-led building construction such as public redevelopment and the 3rd new town projects, as well as improvements in civil engineering performance due to expanded social overhead capital (SOC) investments.

The consumer price inflation rate is forecasted to reach around 1.9%, as international crude oil and raw material prices gradually stabilize in the first half of next year despite continued rises in housing costs such as rent. Real exports, which have driven economic growth this year, are expected to grow by only 2.5% next year due to the reverse base effect from this year's high performance and China's slowing growth. KERI added that if COVID-19 related quarantine measures are re-implemented causing production disruptions, the export growth trend could weaken further.

The current account balance is expected to fall to around $77.2 billion as imports increase rapidly beyond export growth and the improvement in the service balance weakens.

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