Economic and Industry Outlook Seminar: "1% Growth Rate and 3.75% Interest Rate Expected Next Year"

"Creating an Environment to Strengthen Corporate Competitiveness, Including Labor Market Innovation and Passage of Corporate Tax Amendment"

[Asia Economy Reporter Sunmi Park] As the global monetary tightening leads to a full-scale economic recession, South Korea's economy is also expected to see its growth rate remain in the 1% range due to weakening export momentum, the growth engine, and a slowdown in key industries such as petrochemicals.

The Federation of Korean Industries (FKI) held the "2023 Economic and Industrial Outlook Seminar" on the morning of the 7th at the FKI Conference Center in Yeouido under the theme "The Turbulent Korean Economy: Outlook and Diagnosis." In his opening remarks, Kwon Tae-shin, FKI's standing vice chairman, stated, "The Korean economy faces an unpredictable situation due to the prolonged Russia-Ukraine war and excessive private debt. However, increasing government spending is constrained by fiscal soundness, and conditions do not allow for lowering interest rates, leaving few macroeconomic policy options." He added, "The solution to overcoming this crisis lies in reforming unreasonable regulations, innovating the labor market, which ranks among the lowest globally, and promptly passing the corporate tax amendment bill pending in the National Assembly to create an environment that strengthens corporate competitiveness."

The outlook for the Korean economy next year was bleak. Professor Cho Dong-chul of KDI, who delivered the keynote presentation, said, "International organizations such as the IMF are revising down their global economic growth forecasts for next year, which is unfavorable for the Korean economy that has shown export-led recovery since COVID-19." He diagnosed, "The Bank of Korea's 2023 economic growth forecast is currently 2.1%, but it is highly likely to be lowered to the 1% range."

Professor Cho cited the slowdown in export growth and weakening private consumption due to household debt deterioration as factors for the downward revision of Korea's economic growth next year. Regarding exports, he predicted, "The growth rate will significantly decrease due to the impact of the global economic recession." For private consumption, he expressed concern, saying, "Although there are positive factors such as the easing of COVID-19 restrictions, risks are substantial due to the sharp interest rate hikes causing vulnerable financial groups to face limits and adjustments in housing prices."

Park Seok-gil, chief economist at JP Morgan, who presented on "Interest Rate and Exchange Rate Outlook amid U.S. Monetary Tightening," forecasted, "The upper limit of the U.S. policy rate will reach 4.75% early next year, and the Korean base rate will rise to 3.75%, with the Korean won continuing to weaken."

Park predicted, "As the U.S. is expected to maintain its monetary tightening stance for the time being, the Bank of Korea will raise the base rate by 0.25 percentage points in each of the next three Monetary Policy Committee meetings starting in November to prevent an excessive interest rate gap with the U.S." Regarding the exchange rate, he said, "With major trading partners' currencies continuing to weaken and the trade balance recovery expected to be slow, the won is likely to remain weak at least through the first half of next year."

Among domestic key industries, the shipbuilding industry outlook is bright, while semiconductors, automobiles, and steel show mixed trends, and petrochemicals are expected to remain sluggish. The semiconductor industry is expected to see DRAM and NAND suppliers execute conservative capital investments, with DRAM hitting bottom and turning around in the second half of 2023 and NAND in the second quarter of 2023. For automobiles, production is expected to normalize next year, but due to weakened consumption, automobile demand will stagnate downward, leading to increased inventory and incentives and deteriorating industry profitability.

Additionally, domestic steel demand is expected to benefit from increased automobile production and shipbuilding expansion, with strong demand from the automobile and shipbuilding sectors. However, demand for construction and home appliances is expected to decline due to housing transaction slowdowns and recession concerns. Petrochemicals are forecasted to face a triple burden from demand contraction due to rising interest rates and increased supply from China. The shipbuilding industry is expected to see improved performance until the second quarter, driven by rising new ship prices from LNG carrier orders, including remaining Qatar LNG carriers and the Mozambique project (pending).

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