[Weekly Review] Red Light for 4% GDP Growth This Year... Inflation and Household Debt Measures Announced

Source: Bank of Korea

[Sejong=Asia Economy Reporter Son Seon-hee] South Korea's economic growth rate in the third quarter stood at 0.3%. Achieving the government's annual target of '4.0%' this year has become challenging.

◆ 3rd Quarter GDP Growth of 0.3%... Uncertainty Remains in 4th Quarter= The Bank of Korea announced on the 26th that the real gross domestic product (GDP) growth rate for the third quarter of this year (flash estimate, quarter-on-quarter) was 0.3%. This was due to the impact of the fourth wave of COVID-19 and supply bottlenecks, which caused private consumption and investment to decline.

Looking at quarterly growth rates since the outbreak of COVID-19, the first quarter of last year recorded -1.3%, the second quarter -3.2%, followed by 2.2% in the third quarter, 1.1% in the fourth quarter, 1.7% in the first quarter of this year, 0.8% in the second quarter, and 0.3% in the third quarter, marking five consecutive quarters of growth. Although growth was maintained in the third quarter of this year, the rate of increase was significantly lower compared to the first and second quarters.

However, the Bank of Korea maintained its economic growth forecast for this year at 4.0%. To achieve this, a growth rate of over 1% must be attained in the remaining fourth quarter. Given ongoing uncertainties such as global supply chain disruptions and inflation, the outlook is not entirely optimistic.

Meanwhile, the real gross domestic income (GDI) growth rate for the third quarter was also 0.3%, the same as the real GDP growth rate (0.3%), as terms of trade remained similar to those in the second quarter.

◆ Amid High Oil Prices... Government Drastically Cuts Fuel Tax by 20% = As international oil prices surged into the $80 range for the first time in three years since 2018, the government decided to implement the largest-ever reduction in fuel tax.

On the 26th, the Democratic Party and the government held a price countermeasure meeting at the National Assembly and agreed to temporarily reduce fuel taxes on gasoline, diesel, and LPG butane by 20% for about five and a half months from the 12th of next month until the end of April next year. This will allow a maximum reduction of up to 164 KRW per liter for gasoline. Previously, the maximum fuel tax reduction was 15%, making this 20% cut the largest in history. Additionally, the tariff rate on liquefied natural gas (LNG) will be lowered from the existing 2% to 0% during the same period.

The annual revenue from fuel taxes is usually around 28 trillion KRW, and the tax revenue loss due to this 20% temporary reduction is estimated by tax authorities to be about 2.5 trillion KRW. The revenue loss from the LNG tariff reduction is estimated at about 240 billion KRW.

The government's decision to implement the largest-ever fuel tax cut is interpreted as an immediate measure to reduce the public's perceived inflation amid a general rise in various prices, not just fuel taxes. Hong Nam-ki, Deputy Prime Minister and Minister of Economy and Finance, stated, "The annual inflation rate is expected to exceed 2% amid relatively high recent inflation trends," adding, "Price stabilization is the top priority in livelihood policy."

Hong Nam-ki, Deputy Prime Minister and Minister of Economy and Finance, is presiding over the 47th Emergency Economic Central Countermeasures Headquarters meeting held at the Government Seoul Office on the 26th.
[Photo by Yonhap News]

◆ Personal DSR Regulation for Total Loans Exceeding 200 Million KRW= The government announced on the 26th a 'Strengthened Household Debt Management Plan' that significantly advances the timing of expanding borrower-level (individual) total debt service ratio (DSR) regulations.

Deputy Prime Minister Hong said, "We will manage next year's household debt growth rate to be in the 4-5% range, lower than this year," and added, "To establish lending practices based on repayment ability, the second phase of borrower-level DSR regulations will be implemented six months earlier, starting from January next year." He also stated, "We will strengthen DSR standards for the secondary financial sector to block balloon effects in that sector."

Accordingly, from January next year, borrowers with total loans exceeding 200 million KRW will be subject to expanded personal DSR limit regulations.