[2022 Economic Policy] '3.2→4.2→4.0%'... Will the 'Fluctuating' Government GDP Forecast Be Accurate Next Year?

Last December, Significant Deviations in Key Indicators Such as Employment, Inflation, and Exports Compared to Projections

[Sejong=Asia Economy Reporter Son Seon-hee] The government announced its economic outlook for key sectors such as growth rate, inflation, and employment for next year, coinciding with the release of the '2022 Economic Policy Direction.' However, comparing the projections made a year ago with this year's situation reveals significant deviations in each indicator, and concerns have been raised that the reliability of economic forecasts remains low due to the ongoing economic uncertainties caused by COVID-19.

On the 20th, the Ministry of Economy and Finance released the '2022 Economic Outlook,' stating that this year's real Gross Domestic Product (GDP) growth rate is expected to be 4.0%. The government initially projected a GDP growth rate of 3.2% (December 2020 Economic Policy Direction), then revised it upward by 1 percentage point to 4.2% (June 2021 Mid-year Economic Policy Direction), before adjusting it downward again by 0.2 percentage points. Due to the COVID-19 pandemic being the biggest variable, the GDP growth rate forecast fluctuated over time.

The sector where the government's forecast deviated the most this year was 'inflation.' At the time of the December economic policy announcement last year, the government predicted a consumer price increase of 1.1% for this year. This was revised upward once to 1.8% in June, but the final inflation rate announced by the government this time is 2.4%. Compared to 2019 (0.4%) and 2020 (0.5%), the direction of an expanded inflation rate this year was correct, but the actual inflation rate exceeded the forecast by more than double. The government's annual inflation management target (2.0%) was also significantly surpassed.

This large forecast error in inflation rate is analyzed to be due to the surge in international oil prices. The government initially expected the average international oil price this year to be $46 per barrel (Dubai crude basis), but in reality, it soared to an annual average of $70. As a result, prices of various petroleum products and manufactured goods skyrocketed, causing inflation to rise much more than anticipated.

Domestic demand also showed a faster economic recovery than the government expected, leading to a significant deviation in employment forecasts. In December last year, the government projected an increase in employment of around 150,000 people this year. However, employment market recovery occurred earlier than expected from the second quarter, with quarterly employment changes fluctuating around 600,000. Annually, the total increase in employment is expected to reach about 350,000, more than double the projection made a year ago.

As the fourth wave of COVID-19 rapidly spread recently, the government has once again implemented strong social distancing measures. At the time the Ministry of Economy and Finance was formulating next year's economic policy direction, a phased return to normal life was underway, so an unexpected variable has emerged again. Given the ongoing economic uncertainty caused by COVID-19, it is difficult to rule out the possibility that next year's economic outlook will again miss the mark. In particular, various consumption activation measures announced by the government on this day are linked to the quarantine situation, making it difficult to predict the exact timing of their implementation.

Lee Eok-won, First Vice Minister of the Ministry of Economy and Finance, said, "We took a neutral stance on the impact of the COVID-19 situation when setting the economic policy direction," adding, "In reality, it will depend on the quarantine situation and the development of COVID-19." He continued, "Since consumption coupons and others are variable, we will flexibly create additional measures if necessary depending on how the situation unfolds."