KDI Lowers This Year’s Consumption Forecast from 1.8% to 1.6%... "High Interest Rates to Remain for a While"

The Korea Development Institute (KDI) has revised its total consumption forecast for this year down to 1.6%. Private consumption is also expected to grow by 1.7%, which is 0.1 percentage points lower than the previous forecast. This is due to the likelihood that the high interest rate policy will be maintained for some time as the U.S. continues to experience a favorable economy.

On the 14th, KDI released a revised economic outlook reflecting these points. Jeong Gyu-cheol, head of the KDI Economic Outlook Office, stated, "The sluggishness in private consumption is unlikely to improve until the high interest rates are resolved," adding, "Since high interest rates are expected to persist for the time being, it is difficult to expect an improvement in private consumption this year."

Total consumption is projected to increase by 1.6% compared to the previous year. This is a 0.2 percentage point downward revision from the forecast made in November last year (1.8%). Private consumption is also expected to grow by 1.7%, slightly lower than the previous forecast (1.8%), reflecting a slowdown in growth mainly in goods consumption.

The main cause is the high interest rates. In particular, the weakening of expectations for U.S. interest rate cuts due to the strong U.S. economy is exerting upward pressure on domestic market interest rates, which is likely to negatively affect domestic demand. The prevailing analysis is that the timing for domestic interest rate cuts will only be possible in the second half of the year. Jeong said, "Although inflation has decreased significantly, there still seems to be no certainty about such (interest rate cuts)," adding, "In the second half of the year, since we expect core inflation to be around 2.2% and consumer inflation around 2.3%, there may be discussions about adjusting the policy stance."

KDI also revised its investment outlook downward. Facility investment is expected to increase by 2.3%, slightly lower than the November forecast last year (2.4%), and construction investment is projected to decline by 1.4%, reflecting the downturn in the real estate market, which is a larger decrease than the previous forecast (-1.0%).

While the growth rates of consumption and investment have slowed, export growth has expanded. This is because the risk of a hard landing in the U.S. and China has diminished, easing negative views on the global economic outlook. Total exports are expected to increase by 4.7%, higher than the previous forecast (3.8%), reflecting a rebound in the semiconductor market and upward revisions to global economic growth rates. The current account surplus is also expected to significantly exceed the previous forecast of $42.6 billion, reaching a surplus of $56.2 billion, supported by the export recovery.

As a result, KDI maintained its economic growth forecast for this year at 2.2%, unchanged from the previous forecast.

The consumer price inflation rate is expected to be slightly lower at 2.5%, reflecting the slowdown in domestic demand growth, compared to the previous forecast of 2.6%. Core inflation is also projected to be lower at 2.3%, down from the previous forecast of 2.4%. The import price of crude oil (based on Dubai crude), which serves as the benchmark for domestic gasoline prices, is expected to be $81 per barrel, lower than last year. This is a $3 downward revision from the November forecast of $84 per barrel.

However, there are still considerable risk factors. In particular, the situations in the Middle East and China are major risks. Jeong said, "If conflicts in the Middle East intensify, causing oil prices to rise and transportation disruptions, production costs will increase, which could constrain the growth of our economy," adding, "Also, if the real estate market in China crashes sharply and causes an economic recession, it could negatively impact our exports."

There is also a possibility that credit tightening in the construction industry could negatively affect the economy. Jeong stated, "The ongoing restructuring of insolvent construction companies is unlikely to escalate into a financial system crisis," but added, "It is difficult to rule out the possibility that credit tightening in related sectors could occur in the future and act as a negative factor for the real economy."

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