Korea Financial Research Institute "Next Year's Growth Rate 2.1%... Need to Secure Soundness Over Economic Stimulus"

2023 Financial Trends and 2024 Outlook Seminar
Global Trade Recovery, Export and Facility Investment Growth Expected

The Korea Institute of Finance forecasted that our economy will grow by 2.1% next year, supported by a recovery in global trade. It expected this year's growth rate to be only 1.3%, but anticipated a gradual recovery starting next year.

On the 6th, the Institute held the '2023 Financial Trends and 2024 Outlook Seminar,' stating, "Next year, our economy is expected to show a moderate growth rate of 2.1%, driven mainly by exports and related facility investments, thanks to the recovery in global trade."

Consumption Slowdown, Export Increase

The private consumption growth rate is projected to slow from 2.1% this year to 2.0% next year due to high interest rates and high inflation. Construction investment growth is expected to decline from 2.5% this year to -1.6% next year. Factors such as interest rate hikes and risks related to real estate project financing (PF) weigh down construction investment. Facility investment growth is expected to rebound from -1.4% this year to 3.4% next year, driven by a recovery in demand for IT devices.

Total export and import growth rates are forecasted to be 2.6% and 2.4% next year, up from 1.3% and 2.5% this year, respectively. The rebound in total exports is attributed to improvements in global trade, including semiconductors.

The current account surplus is expected to slightly decrease to $28.1 billion this year but increase to $37.3 billion next year. Park Chun-sung, head of the Macroeconomic Research Department at the Korea Institute of Finance, said, "Customs-cleared exports will maintain an annual growth rate of around 5.2% throughout the year, supported by improvements in global trade and increased IT demand." He added, "Customs-cleared imports are expected to record a low average annual growth rate of 1.8% due to a base effect from large-scale energy imports earlier this year."

The consumer price inflation rate is forecasted to decrease from 3.6% this year to 2.6% next year. Although consumer prices are expected to gradually decline due to a weak economic recovery and demand contraction caused by high interest rate burdens, uncertainties in raw material prices and sustained inflation expectations are factors behind this projection.

The average annual yield on 3-year government bonds is projected at 3.6% this year and 3.5% in 2024. Park said, "Due to a retreat in expectations for a rate cut by the Bank of Korea and the U.S. Federal Reserve, the 3-year bond yield is expected to remain high for the time being. However, if the start of rate cuts becomes visible around the end of the first half of 2024, domestic market interest rates are also expected to face downward pressure gradually."

The average won-dollar exchange rate is expected to be around 1,297 won, lower than this year's forecast of 1,311 won. The strength of the U.S. dollar was due to the relatively strong U.S. economy compared to other major countries and the Federal Reserve's tight monetary policy stance. Next year, as the existing factors supporting the U.S. dollar's strength ease, the won-dollar exchange rate is expected to show a gradual downward trend.

The employment rate is projected to rise from 62.4% this year to 62.7% next year, driven by increased employment among women in their 30s and greater labor market participation by the elderly.

On the 13th, as autumn rain fell in the central region, tourists and citizens are walking with umbrellas in Myeongdong, Seoul. Photo by Huh Younghan younghan@

Economic Stimulus Could Be a Double-Edged Sword... Importance of Ensuring Soundness

However, it was noted that uncertainties regarding the core drivers of the growth forecast and downside risks from high interest rates should be carefully considered. Variables include the strength and duration of semiconductor and facility investment recovery, the extent to which household debt limits consumption, deterioration in leading construction indicators due to housing market instability, and a decline in housing transaction volumes caused by rising financial costs from high interest rates.

Park said, "Rather than active economic stimulus, securing domestic and external soundness through market functions will be important. The 2.1% growth in 2024 is a slight rebound following the sluggish 1.3% growth in 2023. Under normal circumstances, accommodative policies for economic stimulus might be considered, but currently, our economy has very limited policy room for easing."

He added, "Monetary policy faces difficulties in lowering interest rates due to persistently high inflation and exchange rate burdens caused by domestic-foreign interest rate differentials. Fiscal policy, if expansionary, could itself exert inflationary pressure, and if government bond issuance increases, interest rates could rise, leading to tightening. Furthermore, financial policy is constrained by the already accumulated private debt burden and concerns over overheating in the housing market, making easing difficult."

He warned, "If additional stimulus policies are implemented under the current domestic and external conditions, this will inevitably increase government or private debt, potentially exacerbating risks such as external soundness, inflation, and financial instability. Especially if the economy does not recover quickly after such policies, downside risks to the economy will increase."

Regarding financial regulation, he emphasized, "Given the very high total household debt level and concerns about risks from high interest rates in the future, attention must be paid to the expansion of borrower soundness risks that could arise from the housing market. The principle of 'loans within the repayment capacity' should be maintained by minimizing exceptions to the Debt Service Ratio (DSR) application policy."

He continued, "The realistic policy direction is to prioritize stability over expansion in monetary, fiscal, and financial policies, maintaining a macro environment where deleveraging and restructuring continue. By securing soundness through this approach, our economy is expected to achieve resilient recovery in the future."

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