6 Reasons Why KDI Views the Global Economy More Negatively

Korea Development Institute (KDI) to Release Global Economic Review (First Half of 2023) on the 24th

Amid expectations that the global economic recovery will be slow this year, the government-funded research institute Korea Development Institute (KDI) has assessed that the global economy is exposed to greater downside risks. KDI identified the deterioration of global financial market conditions, high household and corporate debt, prolonged high inflation, sovereign debt issues in emerging and developing countries, delayed recovery of the Chinese economy, and intensified geopolitical tensions as factors delaying the global economic recovery.

On the 24th, KDI released the ‘KDI Global Economic Review (First Half of 2023)’ outlining these points. KDI stated, “Due to instability in the banking sectors of the United States and Europe and high debt levels, the global economy is assessed to be exposed to greater risks,” while mentioning key risk factors.

KDI pointed to the ‘deterioration of global financial market conditions’ as a factor delaying the global economic recovery in the second half of the year. It noted that the impact of rising interest rates has increased vulnerabilities in both banking and non-banking sectors, raising the likelihood of further deterioration in global financial market conditions. However, it added, “Although concerns over financial instability intensified following the collapse of regional banks in the U.S. in March and liquidity crises at major European banks, these have since eased due to liquidity provision by the Federal Reserve and financial support from the Federal Deposit Insurance Corporation (FDIC).”

‘High debt levels of households and corporations’ were also seen as slowing the global economic recovery. With corporate and household debt levels historically high, especially in countries with a high proportion of variable-rate debt, there is considerable concern that accumulated debt burdens or cascading bankruptcies could significantly suppress investment and consumption. During the COVID-19 pandemic, abundant liquidity led to rising real estate prices in many countries, but recently, due to strong monetary tightening, a downward trend has emerged. KDI explained, “Countries with a high share of variable-rate debt have a structure more vulnerable to declines in housing price growth.”

The prospect of ‘prolonged high inflation’ is another factor raising concerns. KDI noted that while the labor market remains robust, if the Ukraine war prolongs or China’s economy recovers, core consumer prices and inflation expectations could spread. It warned, “Strong tightening monetary policies by central banks in response could further negatively impact economic growth and financial stability,” expressing concern over possible negative chain effects.

Sovereign debt in ‘emerging and developing countries’ is also a major risk. Debt in these regions is often in variable-rate form and heavily denominated in U.S. dollars, making them vulnerable to monetary tightening in advanced economies. KDI predicted, “Requests for debt restructuring may arise in the future, but the complexity of creditor composition will increase, making adjustments more difficult.” According to KDI, the share of Paris Club creditors?comprising 22 countries including the U.S., U.K., France, Germany, Japan, South Korea, and Russia?has decreased from 39% (end of 1996) to 12% (end of 2020). According to sources such as the Wall Street Journal (WSJ), low-income countries have recently increased borrowing from non-Paris Club countries such as China, India, and Saudi Arabia.

The possibility of a delayed recovery in the Chinese economy is also a downside risk that cannot be ruled out. Although expectations for China’s economic recovery are high following the lifting of COVID-19 restrictions and resumption of economic activities, concerns have been raised about delays due to a slowdown in the real estate market and supply chain issues. KDI explained, “While the real estate sector’s slump has somewhat eased following support measures announced in November last year, the high proportion of distressed companies still poses a risk that could constrain future economic recovery.”

Geopolitical tensions, heightened by the Ukraine war and U.S.-China conflicts, are also acting as downside factors for the global economy. Continued fragmentation of the global economy could negatively affect world trade. KDI stated, “Trade barriers are continuously rising, such as Russia’s export bans on food and fertilizers and U.S. semiconductor trade restrictions,” adding, “Intensified economic fragmentation restricts cross-border movement of labor, goods, and capital, increases production costs, and negatively impacts the economy.”

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