Hankyung Research, Lowers This Year's Economic Growth Forecast from 2.9% to 2.5%

Whether Smooth Response to Global Supply Chain Disruptions Is a Key Variable for This Year's Growth Rate

[Image source=Yonhap News]

[Asia Economy Reporter Park Sun-mi] The Korea Economic Research Institute (KERI) has projected this year's economic growth rate to be 2.5%, returning to the level before the outbreak of COVID-19. This is lower than the initial forecast of 2.9%.

On the 8th, KERI announced in its report "KERI Economic Trends and Outlook: Q1 2022" that due to the prolonged Ukraine crisis worsening trade conditions and the recent surge in Omicron cases, it has revised this year's economic growth forecast downward by 0.4 percentage points from 2.9% to 2.5%. The diminishing base effect from COVID-19 and the slowdown in China's economy, which has dampened export growth, also played a major role in the downward revision of the growth forecast.

With the prolonged Ukraine crisis pushing international oil prices above $100 per barrel, there are concerns about significant damage to the Korean economy, which is highly dependent on crude oil. Additionally, prolonged deterioration of economic conditions and exhaustion of policy support capacity have made the downward revision of the growth forecast inevitable.

In the domestic sector, private consumption, which accounts for the largest share, is expected to grow by 2.8%, falling short of 3.0%. This is 0.8 percentage points lower than the 3.6% private consumption growth rate in 2021. Despite expectations for economic recovery, private consumption, which had been recovering, is expected to contract again due to the surge in Omicron cases despite widespread vaccine distribution.

In particular, the prolonged slump in self-employment has weakened income bases, and rapid interest rate hikes have increased the burden of principal and interest repayments on household debt, significantly reducing consumption capacity. Furthermore, recent sharp price increases have dampened consumer sentiment, which has been identified as a factor limiting the recovery of private consumption.

Facility investment is expected to grow by 2.1%, despite aggressive investment in the semiconductor sector, as the global supply chain disruptions have weakened the economic recovery of major countries. This is 6.2 percentage points lower than the 8.3% facility investment growth rate in 2021. Construction investment, which has continued to underperform due to the government's strong real estate suppression policies, is expected to grow by only 1.0%, despite increases in government-led building construction such as public redevelopment, as soaring raw material prices have caused construction delays.

Although construction investment has improved compared to the negative growth (-1.5%) in 2021, the recovery remains slow due to increased uncertainty in development projects, such as the 3rd New Towns designated at the end of 2018, which have yet to begin construction.

With the widespread impact of soaring international raw material prices and supply-demand imbalances, the consumer price inflation rate this year is projected to be 3.8%, 1.3 percentage points higher than 2.5% in 2021. In addition to supply-side factors continuing from last year, the rapid easing of quarantine measures is expected to increase upward pressure on service prices. Moreover, public utility fee increases, delayed due to COVID-19, are expected to be implemented sequentially this year, accelerating inflation.

Real exports, which have driven Korea's economic growth, are expected to grow by only 2.4% due to the reverse base effect from last year's high performance and the slowdown in China's growth. This is 7.5 percentage points lower than the 9.9% export growth rate in 2021. Meanwhile, the current account surplus is expected to decrease from $88.3 billion last year to about $19.2 billion this year due to a surge in imports exceeding export growth and an expanding deficit in the service balance.

Lee Seung-seok, a senior researcher at KERI, explained, "If the deterioration of trade conditions continues due to the prolonged geopolitical risks and the slowdown in economic recovery among major countries, the export growth trend could slow down further."

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