KDI Lowers South Korea's Growth Rate for This Year from 1.8% to 1.5%... "Semiconductor Recovery Slower Than Expected"

2023~2024 Domestic Economic Outlook
"Growth Rate Could Drop to Low 1% If China's Economic Recovery Delays"
"High Early, Low Later Does Not Mean Better Economy in Second Half"

The Korea Development Institute (KDI), the macroeconomic policy think tank of our government, has lowered its economic growth forecast for this year to 1.5%, down from its earlier projection. This adjustment reflects the assessment that the semiconductor market recovery is progressing more slowly than expected.

While maintaining the 'low-high' outlook?that the economy will perform better in the second half of the year compared to the first half?KDI emphasized that this is a 'relative' perspective. In particular, it expressed concerns that if China's economic recovery is delayed, South Korea's economic growth rate could fall to the low 1% range.

Jung Gyu-cheol, Head of the KDI Economic Outlook Office (right), and Cheon So-ra, Senior Research Fellow in charge of KDI Outlook, are presenting the '2023-2024 Domestic Economic Outlook' at the Government Sejong Complex on the 11th.

On the 11th, KDI announced the '2023?2024 Domestic Economic Outlook' at the Government Complex Sejong, containing these details.

KDI forecasted that this year, South Korea's economy will grow by 1.5%, with exports shrinking mainly due to the semiconductor sector. This is a 0.3 percentage point downward revision from the February forecast of 1.8%. The growth rate for next year is expected to reach 2.3%.

KDI expects the economy to grow by 0.9% in the first half of this year, followed by a 2.1% growth in the second half, driven by the recovery of the Chinese economy and easing semiconductor sluggishness. The first half growth rate was revised down by 0.2 percentage points from the initial forecast of 1.1%, and the second half was lowered by 0.3 percentage points from 2.4% to 2.1%.

Jung Kyu-cheol, Director of KDI's Economic Outlook Division, explained, "The main reason for the downward revision is the semiconductor market slump. The situation is slightly worse than when we made the forecast in February, and the semiconductor market recovery in the second half is likely to proceed more slowly than initially expected, so we lowered the growth rates for both halves."

In a report titled 'Recent Semiconductor Market Trends and Macroeconomic Impact' released the previous day, KDI analyzed that if semiconductor export volume falls by 10% and prices drop by 20%, the gross domestic product (GDP) could shrink by nearly 1%.

Specifically, the export value of goods in the first half of this year is expected to decrease from the February forecast of $313 billion to $306 billion, and in the second half from $337 billion to $332.2 billion, resulting in a total export value of $638.2 billion for the year. This is a downward revision of $11.8 billion (1.85%) from the February forecast of $650 billion. Conversely, the import value forecast for this year was revised upward from $628.4 billion to $633 billion.

Private consumption is constrained by high inflation and high interest rates but showed strong growth this year, especially in service consumption, due to increased travel demand. It is expected to moderate next year. Private consumption is projected to increase by 3.0% in 2023 as travel demand gradually recovers, followed by a 2.5% increase in 2024, exceeding the economic growth rate. However, since overseas consumption by domestic residents is not included in domestic value added, the contribution of private consumption recovery to economic growth may be smaller than usual.

Facility investment is expected to increase by only 1.1% in 2023 due to worsening external conditions, but the growth rate is projected to expand to 1.8% in 2024.

The current account surplus is forecast to shrink significantly to $16.4 billion in 2023 from $29.8 billion last year, but it is expected to widen to $38.3 billion in 2024 due to recovery in external demand and improved terms of trade.

Consumer prices this year are expected to rise by 3.4%, lower than last year's 5.1%. This is a 0.1 percentage point slowdown from the previous forecast of 3.5%. In 2024, the inflation rate is projected to slightly exceed the price stability target (2%) at 2.4%.

Director Jung explained, "When we made the forecast in February, we assumed electricity rates would increase about 13 won four times a year?in January, April, July, and October?totaling about 52 won annually, but the increase did not happen in April. The delay in electricity rate hikes has a slight downward effect on consumer prices this year, which has been reflected in the forecast."

The number of employed persons is expected to increase by 270,000 in 2023, influenced by growth in the service sector, and continue to rise by 170,000 in 2024. Although the increase in employment will slow, this is mainly due to demographic changes, and favorable employment conditions are expected to persist, with the unemployment rate remaining low at around 3%.

KDI noted that the timing of semiconductor demand recovery and the extent of China's economic rebound will significantly impact South Korea's economic growth. If semiconductor demand recovery does not become visible in the second half of 2023, the country's economic recovery is likely to be delayed.

Director Jung said, "If the semiconductor or Chinese economic recovery deviates from KDI's expectations, achieving the 1.5% growth rate we mentioned could be difficult. Considering the risks, in a pessimistic scenario, growth could fall to the low 1% range rather than 1.5%." He added, "Although we describe this year’s economy as 'low-high,' we do not expect the economy to be good in the second half. The economy will still be weak in the second half, but relatively better than the first half. Please understand it this way."

Meanwhile, major domestic and international institutions are also revising down their growth forecasts for South Korea. The International Monetary Fund (IMF) lowered South Korea's growth forecast from 1.7% to 1.5% last month on the 11th, marking the fourth consecutive downgrade since July last year. The Asian Development Bank (1.5%), OECD (1.6%), Korea Institute of Finance (1.3%), and Woori Financial Research Institute (1.5%) have issued similar analyses. Global credit rating agency Standard & Poor's (S&P) projected only 1.1% growth on the 3rd. The Bank of Korea had forecast 1.6% in February but is likely to revise it downward in its updated economic outlook.

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