Korea's Growth in the 1% Range for 2 Consecutive Years... "Concerns Over Entrenched Low Growth Increase"

LG Economic Research Institute Forecasts 1.8% Growth Rate Next Year
High Inflation and Real Estate PF Lead to Weak Consumption and Investment
Bank of Korea Expected to Cut Interest Rate by 0.5%p in Second Half

There is a forecast that South Korea's economic growth rate will remain in the 1% range for the second consecutive year.

On the 25th, LG Economic Research Institute projected in its '2024 Macroeconomic Outlook' that South Korea's economic growth rate will rise from 1.3% this year to 1.8% next year. Excluding past global economic crises, this is the first time the growth rate has fallen below 2% for two consecutive years.

This level is below the potential growth rate, and it is analyzed that it will be difficult to feel a recovery in the economy due to sluggish domestic demand such as private consumption and investment. Although the growth rate for next year is 0.5 percentage points (p) higher than this year's estimated growth rate, it is 0.3 percentage points lower than the Bank of Korea's forecast of 2.1% for next year. Specifically, the growth rates for private consumption (1.5%), construction investment (-0.6%), exports (2.1%), and imports (0.5%) are all expected to be lower than this year. Facility investment (-0.3%) is also estimated to decline at a slower rate than this year.

The 1.8% economic growth rate forecast by the institute for next year is lower than projections from other domestic institutions. The Bank of Korea forecasts 2.1%, the Ministry of Economy and Finance 2.4%, and the International Monetary Fund (IMF), Korea Development Institute (KDI), and Asian Development Bank (ADB) all project 2.2% growth. This is the first time an institution has forecast a growth rate in the 1% range.

The consumer price inflation rate for next year is expected to be 2.8%, which is 0.8 percentage points lower than this year's 3.6%, but still significantly above the Bank of Korea's target of 2.0%. The institute stated, "South Korea has recorded growth rates below 2% during crisis situations such as the post-war period in the 1950s, the foreign exchange crisis, and the financial crisis," adding, "With continued export sluggishness and weakening consumption recovery this year, growth is limited to 1.3%, and with growth falling short of 2% next year as well, concerns about entrenched low growth will increase."

The rebound is also expected to be weak. The institute explained, "Due to the fiscal soundness and strengthened national debt management policies, active government responses in terms of monetary and fiscal policies are unlikely, so the strength of the economic rebound will be weak," adding, "High inflation and interest rates are suppressing household consumption, and increased inventory burdens are causing poor corporate facility investment, leading to deterioration in construction market leading indicators and the potential surfacing of risks in real estate project financing (PF), so construction investment is expected to contract."

Exports are also expected to be slow and gradual due to monetary tightening in major countries and the global economic downturn caused by slowdowns in the US, China, and others. The institute estimated, "Consumer price inflation will only reach 2% in the second half of next year and will meet the Bank of Korea's target level (2%) only in 2025," adding, "Due to geopolitical uncertainties such as wars and unpredictable weather events causing fluctuations in energy and food prices, the decline in inflation will be slower than expected."

Amid ongoing instability in the domestic financial market, the base interest rate is expected to be lowered by 0.5 percentage points twice in the second half of next year after confirmation of a rate cut in the US. The institute explained, "The US policy rate cut will begin only in mid-next year and will be smaller than 1 percentage point," adding, "South Korea's policy rate cut will be later and smaller than that of the US." It further added, "The won-dollar exchange rate will gradually decline but entering the 1100 won range will be difficult," and "Since a large current account surplus is unlikely, the exchange rate will only fall to 1270 won in the first half and 1210 won in the second half."

Meanwhile, regarding the global economy, the institute forecast that it will enter an L-shaped long-term low-growth phase, with a full-fledged recession materializing from mid-next year. It predicted the global economic growth rate for next year at 2.4%, lower than this year's 2.9%, indicating that the recession phase expected this year has been postponed to next year and will worsen compared to this year. It also estimated that after the COVID-19 pandemic, the world has entered a 'high inflation, low growth' phase, with global inflation rates from 2024 to 2028 averaging 4.9%, 1.7 percentage points higher than the 3.2% average in the five years before COVID-19, and economic growth rates dropping from 3.4% to 2.6%.

The institute stated, "The global economic recession initially expected this year has been delayed and will materialize from mid-next year," adding, "Next year will be the year when the global economy fully enters an L-shaped long-term low-growth phase."

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