[2022 Economic Policy] South Korea's Growth Rate Forecasted at 3.1% Next Year... Assuming 'Neutral' COVID-19 Uncertainty

Government Announces 2022 Economic Policy Direction…Private Consumption to Increase by 3.8%, Supporting Recovery
Demand Growth and Government Support Expected to Boost Employment by 280,000 Compared to This Year
COVID-19 Risks Assumed as 'Neutral' in Forecasts

1) IMF World Economic Outlook (October 2021)
2) Current consumer price index forecast (2015=100)
December and annual results for this year (as of December 31) are scheduled to be published based on the new series (2020=100) after the base year revision

[Sejong=Asia Economy Reporter Kim Hyunjung] The government announced plans to operate a large-scale investment project worth approximately 115 trillion won to achieve 3.1% economic growth next year. It expects that the Korean economy, which had been contracted due to the spread of COVID-19, will return to a normal trajectory and continue its recovery trend. However, due to ongoing domestic and international uncertainties such as the spread of COVID-19 variants and prolonged supply chain disruptions, difficulties in people’s livelihoods including new polarization are expected to persist, and the government plans to take active measures in response. The government also assumed COVID-19 risks, including the spread of variants, as 'neutral' when producing these forecasts.

On the 20th, the government announced the '2022 Economic Policy Direction' containing these details.

◆ From Shock and Crisis Recovery Phase to 'Normal Recovery' Phase = The government forecasts that the Korean economy, which recorded negative economic growth (-0.9%) in 2020 due to the COVID-19 crisis shock and went through a crisis recovery phase (4.0%) this year, will regain its 'normal trajectory' with a 3.1% growth rate next year. In this case, Korea’s average economic growth rate from 2020 to 2022 will be 2.1%, significantly surpassing the OECD average (1.4%), making it the fastest recovering among major advanced countries.

In particular, the government expects exports and facility investments to maintain their growth trend, and the pace of domestic demand recovery to accelerate compared to last year. Although the export growth rate will slow from 25.5% to 2.0% due to the base effect, improvement is expected to continue driven by semiconductors, automobiles, and new industry sectors. Balanced export growth is anticipated across all regions, including the US, China, and the five ASEAN countries where economic rebound is expected. Imports are forecasted to increase by 2.5%, outpacing exports, with the current account surplus expected to be around 80 billion USD.

Private consumption is expected to increase by 3.8%, following -5.0% in 2020 and 3.5% last year. This is attributed to the government’s phased approach to daily recovery, accumulated consumption capacity, and a psychological reduction in sensitivity to infectious diseases.

Investment conditions are expected to improve due to economic recovery, improved corporate sentiment, and easing of automobile production disruptions, with facility investment projected to grow by 3.0% annually. However, uncertainties remain regarding the timing of resolution of semiconductor supply shortages for vehicles.

Both residential and commercial/industrial buildings are showing growth trends, and large-scale investment projects such as the metropolitan area GTX railway project, national balanced development projects, and the Korean New Deal are expected to drive construction investment up by 2.7% annually next year. Additionally, the government expects intellectual property product investment to increase by 3.8% annually.

[Image source=Yonhap News]

◆ Employment Improvement Expected through Policy Support…Employment to Increase by 280,000 = The government anticipates that employment demand will improve due to daily recovery and job support policies, with the number of employed persons increasing by around 280,000 compared to the previous year. In particular, employment in face-to-face service industries, which sharply declined due to COVID-19, is expected to recover, and jobs in care, health, and social welfare sectors are expected to increase due to expanded government support, aging population, and increased dual-income households.

The employment rate (ages 15-64) is forecasted to rise by 0.4 percentage points (p) to 66.9% from 66.5% this year, while the unemployment rate is expected to remain unchanged at 3.6%.

However, there are considerable constraints. First, structural declines in daily workers and self-employed with employees are expected to continue due to accelerated automation and online shifts triggered by COVID-19. The working-age population, which decreased by about 349,000 this year, is expected to shrink further by 355,000 next year, structurally limiting employment growth.

◆ COVID-19 Risks Persist…Uncertainty Assumed as 'Neutral' = The forecasts announced by the government on this day assume COVID-19 spread-related risks as 'neutral.'

Lee Eokwon, First Vice Minister of Strategy and Finance, explained, "The spread phases at the end of this year and early next year, as well as in July and August, are seen as a gradual normalization process, so we assumed the COVID-19 quarantine situation neutrally. Depending on how this uncertainty plays out, it could be a positive factor for faster economic recovery or a risk factor if prolonged."

He added, "Ultimately, the COVID-19 situation affects domestic consumption, especially face-to-face service consumption, so overall, when considering exports and investments comprehensively, it is neutral. The government’s 4.3 trillion won scale three major package supports will also be tailored flexibly according to the quarantine situation, including consumption coupons. Since this is all variable, additional measures will be prepared if necessary," he concluded.