"Era of Conflict, Austerity, and Loss"... South Korea's Economic Growth Rate Expected to Be in the 1% Range Next Year

Hana Financial Management Research Institute 2023 Economic and Financial Market Outlook
Growth Rate Plummets from 2.6% to 1.8%
Domestic and External Risks Persist... Concerns Over Decline in Korean Exports

On the afternoon of the 16th of last month, completed vehicles were waiting in the storage yard next to the export shipment dock at Hyundai Motor Company's Ulsan plant. [Image source=Yonhap News]

[Asia Economy Reporter Minwoo Lee] A forecast has emerged that South Korea's economic growth rate will sharply fall to the 1% range next year. The analysis suggests that growth will slow due to the impact of high inflation, high interest rates, and high exchange rates amid the war between Russia and Ukraine and the global trend of tightening monetary and fiscal policies.

On the 18th, Hana Financial Management Research Institute published a report titled "2023 Economic and Financial Market Outlook" containing these details.

An Era of Conflict, Tightening, and Loss... Intensified Economic Volatility and Vulnerability

Source=Hana Financial Management Research Institute

First, it analyzed that geopolitical risks are increasing externally. The unexpected war between Russia and Ukraine has intensified the confrontation between the West and Russia, while the power competition between the United States and China is also escalating.

It also anticipated that risks related to policies will continue. To curb inflation, countries are implementing monetary tightening policies and shifting fiscal policies toward a tightening stance. In this situation, the global cooperation system is being damaged, reducing the benefits of globalization that have been enjoyed so far, and economic activities of households and companies will be constrained due to asset price declines and debt risks.

Jeong Yutak, a research fellow at Hana Financial Management Research Institute, emphasized, "In 2023, financial turmoil and growth slowdown are inevitable," adding, "Uncertainty may expand in the process of seeking a new equilibrium amid structural changes such as supply chain reorganization, so caution is needed."

High Inflation and Interest Rates... South Korea's Growth Rate Slows to the 1% Range

Source=Hana Financial Management Research Institute

Hana Financial Management Research Institute expects South Korea's economic growth rate to be around 1.8% next year. This is a significant slowdown compared to this year's estimated growth rate of 2.6%. The judgment is based on the expectation that the negative ripple effects of high inflation and high interest rates will fully materialize from next year.

Specifically, the private consumption growth rate is expected to drop to 2.2%, about half of this year's estimate of 4.1%. Although the recovery trend will continue supported by increased service consumption capacity and overseas travel, it is analyzed that the decline in households' real purchasing power, increased debt burden, and asset price declines will hold back growth.

Construction investment growth is expected to somewhat recover. This is because the rise in construction material prices is calming down, and leading indicators such as construction orders and building permits are expected to improve. However, considering the real estate market contraction, reduction in social overhead capital (SOC) budgets, and rising capital procurement costs, the growth rate is projected to be only 1.4% (this year's estimate is -1.6%).

Facility investment growth next year is predicted to continue its negative trend at -0.2%, following this year's estimated -4.3%. It is explained that amid the worsening semiconductor market, rising capital procurement costs, and expanding economic uncertainty, the recovery will be delayed mainly in the IT manufacturing sector.

Exports to Contract Next Year... High Inflation Expected to Persist

Exports (based on customs clearance), which were expected to increase by 8.5% this year, are forecasted to contract by -0.6% next year. It is judged that amid the global growth slowdown, prices of key export items including semiconductors will fall, and geopolitical risks will be highlighted.

Meanwhile, the consumer price inflation rate next year is expected to ease somewhat to 3.5%, compared to this year's estimate of 5.3%. This is due to the stabilization of international oil prices and downward pressure on the economy. However, considering supply instability of raw materials caused by Russia, downward price rigidity in services, and the rise of the won-dollar exchange rate, the high inflation trend is expected to continue.

Research fellow Jeong expressed concern, saying, "For the first time since 2008, there is a high possibility that high inflation exceeding the Bank of Korea's target and sluggish growth below the recent trend will occur simultaneously."

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