"China Risk Worst-Case Scenario: Next Year's Growth Rate 1.9%... Threat to Potential Growth Rate"

Bank of Korea Economic Outlook Report, Analysis of Three Scenarios

Lee Chang-yong, Governor of the Bank of Korea, is presiding over the Monetary Policy Committee meeting held on the 24th at the Bank of Korea in Jung-gu, Seoul. / Photo by Joint Press Corps

The Bank of Korea maintained its forecast for this year's real Gross Domestic Product (GDP) growth rate at 1.4%, but lowered next year's forecast by 0.1 percentage points to 2.2% due to concerns over the sluggish Chinese economy. In the worst-case scenario, where "growth further weakens due to continued sluggishness in China's real estate sector," next year's growth rate could be further revised down to 1.9%, which threatens the potential growth rate.

On the 24th, the Bank of Korea stated in its economic outlook report that "there is significant uncertainty in the growth trajectory due to factors such as the economic trends of major countries and energy prices."

The Bank of Korea observed that the domestic economy showed signs of easing weakness in exports and manufacturing in the second quarter, and although the recent recovery in China has weakened, it expects gradual improvement due to a rebound in the IT sector and an influx of Chinese tourists.

Looking at this year's economic outlook by sector, private consumption, which grew by 4.1% last year, is expected to increase by 2.0% this year, down 0.3 percentage points from the May forecast of 2.3%. The growth rate of facility investment is also expected to worsen from -0.9% last year to -3.0% this year.

On the other hand, the growth rate of construction investment is forecast to improve from -2.8% last year to 0.7% this year.

The growth rate of goods exports is expected to decline from 3.6% last year to 0.7% this year, and the growth rate of goods imports is forecast to fall from 4.3% to -0.8%.

The Bank of Korea's forecast for this year's consumer price inflation rate remains at 3.5%, unchanged from the May forecast, but the core inflation rate (excluding food and energy) was revised up by 0.1 percentage points to 3.4%. The Bank's forecast for next year's consumer price inflation rate remains at 2.4%, the same as the May forecast.

The increase in the number of employed persons this year is expected to be 290,000, exceeding the May forecast of 250,000, although this is a sharp decline compared to last year's 820,000. The unemployment rate for this year is forecast at 2.9%, lower than the previous forecast of 3.0%.

The Bank of Korea explained, "While employment in the manufacturing sector is expected to continue declining, labor demand in the service sector remains favorable, and with increased labor supply from women and the elderly, the slowdown in the increase in employment is expected to be slower than anticipated."

The current account surplus is expected to reach $27 billion, exceeding the May forecast of $24 billion. The Bank of Korea stated, "Although the current account deficit widened early in the year due to worsening export performance, it turned to a surplus in the second quarter due to easing export weakness and reduced energy imports. In the second half of the year, the surplus is expected to expand compared to the first half, supported by factors such as the allowance of group tours from China."

The number of Chinese entrants is estimated to increase by an additional 830,000 in the second half of this year and 1.38 million next year compared to the May forecast, due to the allowance of group tours.

Bank of Korea: Increased Uncertainty in US-China Economies

Additionally, considering the significant uncertainties related to the future economic trends of major countries and raw material prices, the Bank of Korea analyzed three alternative scenarios.

First, in Scenario 1, where "the US and other major economies continue a favorable growth trend, positively affecting the IT sector," the growth rate is projected to rise to 1.5% this year and 2.4% next year.

However, in Scenario 2, where "growth further weakens due to continued sluggishness in China's real estate sector," this year's growth rate is expected to fall to 1.2?1.3%, and next year's growth rate to 1.9?2.0%. This worst-case scenario, where Chinese risks spread and growth weakens, implies that next year's growth rate could fall below the potential growth rate level of 2%.

In Scenario 3, where "geopolitical risks and abnormal weather cause further increases in raw material prices," this year's growth rate is forecast at 1.3%, and next year's at 2.1%.

The Bank of Korea said, "The domestic economy showed growth and inflation trends broadly in line with the May forecast, but uncertainty has significantly increased since the second half of the year. Going forward, as the influence of major drivers that have led the global economy, such as the pandemic and war, gradually diminishes, it is necessary to further strengthen the internal momentum of our economy."

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