Darker Economic Outlook... KDI Lowers South Korea's Growth Rate to 1% Range for Next Year

Next Year's Consumer Price Inflation Rate Raised from 2.2% to 3.2%
"Possible Further Slowdown in Exports and Manufacturing Due to US Interest Rate Hikes and Global Economic Contraction"

[Image source=Yonhap News]

[Asia Economy Sejong=Reporter Kwon Haeyoung] The Korea Development Institute (KDI) has downgraded its forecast for South Korea's economic growth rate next year to 1.8%. This is due to a sharp rise in U.S. interest rates and a global economic slowdown, which have significantly weakened export growth and slowed investment. The consumer price inflation rate is also expected to remain high at 3.2%.

On the 10th, KDI released its "2022 Second Half Economic Outlook," lowering its forecast for South Korea's economic growth rate next year from 2.3% to 1.8%, a 0.5 percentage point cut. The consumer price inflation rate for next year was revised upward from 2.2% to 3.2% during the same period.

KDI also lowered its economic growth forecast for this year to 2.7%, down 0.1 percentage points from the previous forecast of 2.8%. The annual consumer price inflation forecast for this year was raised by 0.9 percentage points from 4.2% to 5.1%.

KDI stated, "Domestic demand shows strong private consumption growth and some easing of investment sluggishness, with employment remaining favorable mainly in the service sector, while exports are weak due to the global economic slowdown." It added, "If the U.S. interest rate hikes accelerate further or if the global economy, including China, contracts significantly, South Korea's economic growth is likely to slow further, especially in exports and manufacturing."

Private consumption next year is expected to recover centered on services as the impact of COVID-19 fades, but due to high inflation and rising market interest rates, the growth rate is projected to be 3.1%, lower than this year's 4.7%. Facility investment and construction investment are expected to increase by only 0.7% and 0.2%, respectively. Exports are also estimated to record a low growth rate of 1.6% due to the global economic slowdown.

Internally, KDI anticipates that a sharp increase in the Bank of Korea's base interest rate or the occurrence of credit crunches could deepen the economic slowdown. It particularly noted that the high level of private debt is likely to act as a significant downside risk to the economy amid rising interest rates. Accordingly, KDI recommended a need to moderate the pace of monetary policy tightening.

KDI stated, "To prevent inflation expectations from becoming unstable, the current trend of raising the base interest rate should be maintained for the time being, but the possibility of an economic slowdown should also be considered." It added, "Considering the risk of excessive economic contraction in the future, it is necessary to raise the base interest rate at a gradual pace." Furthermore, it emphasized, "From a financial policy perspective, while maintaining the macroprudential strengthening stance, attention should be paid to ensure that system risk management does not lead to the accumulation of non-performing assets, and measures to protect vulnerable borrowers should be prepared in anticipation of an economic slowdown."

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