South Korea's Economic Growth Rate Falls to 2% Range... 'S Fear' Becomes Reality

Bank of Korea and Government Likely to Lower This Year's Economic Growth Rate to '2% Range'
Raw Material Supply Shortages, US Tightening, and China's COVID Lockdowns
KDI Lowers Growth Forecast to '2.8%'... "Export Slowdown"
Stagflation Fear Becomes Reality, Raising Concerns of 'Economic Downturn Vicious Cycle'

Amid concerns over a slowdown in the real economy caused by global inflation, warning signs have been raised for South Korea's economic growth rate. Following domestic and international institutions such as the International Monetary Fund (IMF) and the Korea Development Institute (KDI) lowering their growth forecasts for this year, the government and the Bank of Korea are also expected to officially adopt a 'low growth, high inflation' stance by revising the growth rate down to the 2% range. The supply chain instability triggered by the Ukraine crisis, the sharp rise in raw material prices, U.S. monetary tightening, and China's economic lockdown have combined with the triple high waves of high inflation, high interest rates, and high exchange rates, intensifying concerns that the 'S (stagflation - rising prices amid economic stagnation) fear' is becoming a reality for the Korean economy.

Government and Bank of Korea Likely to Lower Growth Rate to 2% Range

According to the Bank of Korea on the 19th, it will announce a revised economic outlook on the 26th. In the revised economic outlook released on February 24, the growth forecast for this year was maintained at 3.0%, the same as in November last year, but this time it is highly likely to be lowered to the mid-to-late 2% range. Previously, the Bank of Korea viewed the Ukraine crisis and the spread of Omicron as downward risks to growth but expected to maintain 'at least 3% growth' due to consumption recovery following the easing of quarantine measures and the new government's plan to prepare a supplementary budget. However, as the Ukraine crisis has lasted longer than expected, worsening raw material supply instability, combined with China's stringent COVID-19 lockdown policies and unexpected adverse factors such as the U.S. inflation shock, there is a growing consensus within the Bank of Korea that a downward revision of the economic growth rate is inevitable.

Professor Ha Jun-kyung of Hanyang University's Department of Economics said, "Since the situation has changed since February due to the prolonged Ukraine crisis and the pace of U.S. interest rate hikes, the Bank of Korea will likely lower the growth rate to the Korea Development Institute (KDI) level (2.8%). Although increased consumption from COVID-19 recovery could be a positive factor for growth, global economic uncertainties seem to have a greater impact."

The Ministry of Economy and Finance is also expected to announce the new government's economic policy direction early next month and revise the economic growth and inflation forecasts. At the end of last year, the government projected a growth rate of 3.1% for this year, but a downward revision to the mid-to-late 2% range is inevitable this time.

Deputy Prime Minister and Minister of Economy and Finance Choo Kyung-ho is responding to lawmakers' questions at the plenary meeting of the Planning and Finance Committee held at the National Assembly in Yeouido, Seoul, on the morning of the 17th.
[Photo by Yonhap News]

Concerns Over Prolonged Ukraine War and China Lockdowns

Domestic and international institutions have already been lowering South Korea's growth forecasts one after another. The day before, the KDI presented a growth forecast of 2.8%, lowering it by 0.2 percentage points from the November forecast of 3.0%. However, this is still higher than other institutions that have lowered South Korea's growth forecast, such as the International Monetary Fund (IMF, 3.0%→2.5%) and the Korea Economic Research Institute (2.9%→2.5%). The reason KDI's growth forecast is higher than other domestic and international institutions is due to the supplementary budget effect. KDI estimated that the supplementary budget of 59.4 trillion won would raise the growth rate by 0.4 percentage points, and excluding this effect, the growth rate would be 2.4%. KDI explained that the growth forecast was lowered considering the rise in import prices due to soaring raw material prices, interest rate hikes in major countries including the U.S., and the possibility of export slowdown due to worsening external conditions. It also forecasted that this year's consumer price inflation would reach 4.2%.

Although KDI presented a relatively optimistic forecast with a growth rate in the high 2% range, domestic and external conditions are challenging. If the Ukraine crisis and China's economic lockdowns are prolonged, import prices will rise, and global trade contraction could damage exports. KDI also expects export growth to slow, causing next year's growth rate to fall to 2.3%. Furthermore, if a vicious cycle of 'high inflation → wage increases → further inflation' occurs, there is a possibility that private consumption will shrink due to a decrease in real purchasing power.

Professor Yang Jun-mo of Yonsei University's Department of Economics said, "Ultimately, the growth rate will be determined by whether the Ukraine war and the prolonged surge in oil prices continue," and predicted, "This year's growth rate is expected to be in the mid-to-late 2% range."

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