"Growth Rate Lowered to 1.6% This Year... Increased Uncertainty in China Reopening, Oil Prices, and Real Estate (Summary)"

The Bank of Korea Lowers This Year's Consumer Price Inflation Rate to 3.5%, Down 0.1%P

[Image source=Yonhap News]

[Asia Economy reporters Seo So-jeong and Moon Je-won] The Bank of Korea has lowered its forecast for this year's real Gross Domestic Product (GDP) growth rate to 1.6%, down 0.1 percentage points. The forecast for this year's consumer price inflation rate was also lowered by 0.1 percentage points from 3.6% to 3.5%. Amid amplified global economic uncertainties, the Bank of Korea identified key variables influencing the Korean economy this year as the effects of China's reopening (resumption of economic activities), international oil prices, and domestic real estate prices.

In the revised economic outlook announced on the 23rd, the Bank of Korea slightly lowered its economic growth forecast for this year from 1.7% to 1.6%. This is 0.1 percentage points lower than the forecast made in November last year and matches the government's forecast (1.6%).

Bank of Korea Governor Lee Chang-yong explained, "The possibility of a soft landing in the US and Europe and China's economic recovery were factors that would raise the growth rate by 0.2 percentage points compared to the November forecast, but the sluggishness in the information technology (IT) sector and the domestic real estate market slowdown were factors lowering it by 0.3 percentage points. Taking these comprehensively into account, we adjusted the forecast downward by 0.1 percentage points."

◆Weakness due to global economic slowdown and interest rate hikes= The Bank of Korea's growth forecast for this year is lower than most institutions such as credit rating agency Fitch (1.9%), the Organisation for Economic Co-operation and Development (OECD, 1.8%), Korea Development Institute (KDI, 1.8%), and the International Monetary Fund (IMF, 1.7%), but higher than the Korea Economic Research Institute (1.5%). The Bank of Korea's growth forecast is below the potential growth rate of the Korean economy, estimated to be in the 2% range.

The Bank of Korea's Monetary Policy Committee had already indicated in last month's monetary policy direction meeting minutes that this year's growth rate would fall below the November forecast (1.7%). A growth rate in the 1% range is the lowest since the 2000s, except for the negative growth in 2020 (-0.7%) due to COVID-19 and the global financial crisis in 2009 (0.8%).

The Bank of Korea stated, "Going forward, the domestic economy will continue a sluggish growth trend due to the global economic slowdown and rising interest rates. From the second half of the year, domestic growth is expected to gradually improve with the recovery of China's economy and the IT sector, but the outlook remains highly uncertain."

In particular, the extent to which the positive effects of China's reopening will impact the Korean economy is expected to be a key factor. Governor Lee said, "The upward adjustment of China's economic growth is undoubtedly positive for Korea, but there are political and economic uncertainties such as the US-led semiconductor 'Chip 4' alliance. If China's economy recovers centered on consumer goods rather than investment goods, unlike in the past, we, as suppliers of intermediate goods, may not see as much benefit as before." He added, "In the past, when China's economy grew by 1%, Korea's growth rate was estimated to increase by about 0.2 to 0.25%, but this time we conservatively expect about half that effect."

Kim Woong, head of the Bank of Korea's Research Department, added, "It is expected that about 1.95 million Chinese tourists will visit Korea this year, which is about one-third of the pre-COVID-19 level of 6 million. For every 1 million Chinese tourists, Korea's GDP increases by about 0.08%, which is a significant figure."

He also noted, "The rebound in China has not been fully reflected in oil prices, which is another uncertain factor. The Bank of Korea forecasts international oil prices to fluctuate around the low $80s per barrel, but prices could suddenly rise, increasing inflationary pressure and potentially having a negative impact."

On the 15th, gasoline was being sold at 1,545 KRW per liter and diesel at 1,528 KRW per liter at a gas station in Incheon. The price of diesel, which used to be more expensive than gasoline, has recently narrowed to the lowest difference of the year due to the rise in gasoline prices and the fall in diesel prices. Photo by Jinhyung Kang aymsdream@

Looking at the Bank of Korea's economic outlook by sector, private consumption is expected to increase by only 2.3% this year due to weakened real purchasing power and increased principal and interest repayment burdens, resulting in a slow recovery. By sector, pent-up demand for overseas consumption is expected to become more active, but domestic consumption is projected to increase only moderately. In particular, the deepening slump in the housing market is expected to act as a downside risk.

Facility investment, which declined by -0.7% last year, is expected to worsen to -3.1% this year due to the global economic slowdown and increased financial costs. The manufacturing sector is expected to see a significant decrease in the IT sector centered on semiconductors, with the non-IT sector also remaining sluggish. The service sector is expected to grow, led by IT services and air transportation.

Construction investment is forecast to decline by 0.7% this year following last year's -3.5%, with downside factors including the housing market slowdown and reduced social overhead capital (SOC) budgets. Residential building construction is expected to see only a slight increase in construction volume despite strong orders, due to a contraction in new housing sales. Non-residential building construction is expected to remain sluggish due to the economic slowdown, and civil engineering investment is also expected to decline as the government's SOC budget decreases.

Kim said, "The adjustment in housing prices is expected to continue for some time. Since jeonse (long-term lease) prices have fallen more than sales prices, there is a phenomenon of prices falling while exchanging." He added, "Despite the decline in housing prices, higher interest rates have increased the burden of borrowing money to buy homes, and the competition rate for subscription has significantly decreased. The biggest risk related to real estate is unsold units, which is a concern in terms of its impact on consumption growth in the economy."

Merchandise exports are expected to continue slowing due to the global economic downturn but gradually improve in the second half of the year with the recovery of China's economy and the IT sector. The merchandise export growth rate is forecast to fall from 3.1% last year to 0.5% this year. Both IT and non-IT sectors are expected to see declines in customs-cleared exports this year due to price drops.

Accordingly, the net growth contribution of domestic demand is expected to shrink from 1.9 percentage points last year to 1.3 percentage points this year, and the net growth contribution of exports is expected to decrease from 0.7 percentage points to 0.3 percentage points.

◆Semiconductor rebound timing likely delayed= The rebound timing for semiconductors, a key export product, is expected to be delayed. Lee Hwan-seok, Deputy Governor of the Bank of Korea, said, "We originally expected semiconductors to rebound in the second quarter, but it seems it will be later than that. China's reopening is expected to increase semiconductor demand in the second half, and inventory adjustments will be completed this year." He added, "High-performance servers will increase further in the second half, boosting semiconductor demand. In the mid-term, with the expansion of AI services related to ChatGPT, demand for high-performance memory is expected to rise." The Bank of Korea assumes that the semiconductor market will gradually recover from mid-year, with exports and the current account balance improving in the second half.

Employment is expected to increase by 130,000 this year and 150,000 next year. Kim explained, "Employment increased by 820,000 last year, but this year it will decrease to the 100,000 range. The economic slowdown is showing its effects, and the improvement due to reopening has been partially reversed."

The Bank of Korea also lowered its forecast for this year's consumer price inflation rate from 3.6% to 3.5%. An inflation rate in the 3% range is the highest since 2008 (4.7%) when the global financial crisis began, except for last year's 5.1%. The forecast for next year's consumer price inflation is 2.6%, and the core inflation rate forecast is 2.0%.

Deputy Governor Lee said, "The consumer price inflation rate in February is expected to fall below January's level (5.2%) due to a decline in petroleum product prices, and in March, the base effect from last year's sharp rise in international oil prices is likely to significantly lower inflation."

However, core inflation (excluding food and energy) is expected to slightly exceed the previous forecast of 2.9%, reaching 3.0%. Although the economic slowdown acts as a downside factor, accumulated cost pressures are gradually reflected in public utility charges, and secondary ripple effects may appear.

The current account surplus is forecast to be $26 billion this year and $48 billion next year.

Kim said, "The merchandise trade balance will remain weak for some time due to declining exports but is expected to gradually improve after the second half with the rebound in China's economy and the IT sector. The service trade balance is expected to see a widening deficit centered on travel and transportation as the pandemic-related positive factors weaken. The primary income balance is expected to see an expanded surplus due to increased interest income from rising interest rates and increased dividend inflows from overseas subsidiaries."

The current account surplus as a percentage of GDP is expected to be in the mid-1% range this year and next year, and in the mid-2% range the following year.

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