"Next Year Consumption Declines and Interest Rates Rise... Strong Raw Material Prices Are the 'New Normal'"

LG Economic Research Institute '2023 Economic Outlook for Business Leaders' Report
"Next Year Korea's Growth Rate 1.4%, Export Growth Rate Falls to 0% Range"
"Inflation Rate Higher Than Wage Increase Rate, Employment and Consumption Weak"

A view of heating appliances arranged. (Photo by Jeonja Land)

[Asia Economy Reporter Moon Chaeseok] An analysis has emerged that with next year's economic growth rate falling to the 1% range, employment contraction and consumption sluggishness will become full-fledged. The strong prices of raw materials are expected to become a 'new normal,' acting as a management challenge.

On the 27th, LG Economic Research Institute released a report titled '2023 Economic Outlook for Business Leaders' containing these details. It forecasted that the global economic growth rate will drop by 1 percentage point from 3.2% this year to 2.2% next year, and South Korea's economic growth rate will decrease by 1.1 percentage points from 2.5% to 1.4%. It anticipated that the export growth rate will fall to the 0% range, continuing the trade deficit.

Semiconductor and home appliance companies struggling with accumulating inventory are expected to continue to be directly hit by consumption sluggishness next year. The institute predicted that consumption sluggishness will become full-fledged as prices rise significantly more than wages and employment contracts. The high inflation situation is expected to continue next year as well.

A bigger problem is that the interest rate hike trend, which negatively affects corporate finance, is expected to continue for the time being. This is because monetary authorities have effectively declared war on inflation. The institute predicted that both U.S. and South Korean authorities will finish raising interest rates in the first quarter of next year. However, it forecasted that the policy interest rate gap between Korea and the U.S. will widen further to more than 1.5 percentage points.

The institute expressed a pessimistic view that a European sovereign debt crisis and financial institution insolvency could become full-fledged next year. This is because the interest rate hike cycle is too fast and strong. If the fire spreads to the domestic capital and bond markets, it is obvious that red lights will turn on for corporate financing. The institute predicted, "(Financial) instability will not be easily resolved as its cause shifts from rapid monetary tightening to rising credit risk due to economic deterioration, and domestic capital and bond market instability will persist."

The institute identified factors directly affecting corporate managers next year as exchange rates, U.S.-China technological competition, and raw material prices. In particular, it said the rising trend in raw material prices will become the 'new normal.' It expected the price strength to continue due to continuously increasing demand for key minerals and significantly reduced investment in raw materials caused by high interest rates. However, the institute observed that the pressure for oil price increases may somewhat ease due to the somewhat gloomy economic outlook next year.

The institute urged companies to enhance their 'resilience,' the nature of quickly responding to crises in the short term. It advised that since the business environment has turned negative and opportunity costs increase if investments fail, companies should focus on selection and concentration. In the long term, it explained that companies should reduce various fixed costs such as debt to minimize shocks from demand sluggishness. The institute said, "It is necessary to strengthen checks on macroeconomics, major policies of each country, and geopolitical changes, and promptly reflect these in key decision-making."

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