[2023 Economic Outlook] Next Year's Growth Rate in the 1% Range... Bleak Korean Economy

[Asia Economy Sejong=Reporters Kwon Haeyoung and Son Seonhee] There is a flood of forecasts that South Korea's economic growth rate will fall to the 1% range next year. Amid the triple crisis of high inflation, high exchange rates, and high interest rates, not only exports, the backbone of growth, but also private consumption are shrinking, leading to expected deterioration in production, investment, and employment. Concerns are emerging that a harsh cold wave will blow through our economy, with even an 'L-shaped recession (prolonged slump after economic downturn)' being mentioned.

◆Growth rate likely to fall to the 1% range next year＝According to major domestic and international economic institutions on the 5th, South Korea's economic growth rate is expected to fall to the 1% range next year. Last month, the Bank of Korea forecast next year's growth rate at 1.7%, lowering its previous estimate (2.1%) by 0.4 percentage points. The Korea Development Institute (KDI) and the Organisation for Economic Co-operation and Development (OECD) also presented growth rate forecasts of 1.8%. This is below South Korea's potential growth rate, which is considered to be in the 2% range.

Institutions that predicted growth rates in the low 2% range, such as the International Monetary Fund (IMF, 2.0%) and the Asian Development Bank (ADB, 2.3%), are also expected to further downgrade their forecasts. The Ministry of Economy and Finance is also considering lowering next year's growth rate to the high 1% range in the economic policy direction to be announced in mid to late this month.

Based on the Bank of Korea's forecast, a drop in the growth rate from 2.6% this year to the 1% range next year signifies South Korea's economy entering a full-fledged downward phase. The times when South Korea's growth rate fell below 2% were only during the second oil shock in 1980 (-1.6%), the 1998 financial crisis (-5.1%), the global financial crisis in 2009 (0.8%), and the spread of the COVID-19 pandemic in 2020 (-0.7%). All were periods of economic crisis.

◆Exports slump and domestic demand also contract＝Signs of an economic crisis are appearing everywhere. With sharp interest rate hikes by major countries and the war in Ukraine spreading fears of a global economic recession, exports have taken a direct hit. Export growth slowed from July and turned negative from October. October exports decreased by 5.7% compared to the same period last year, marking the first decline in two years since October 2020 (-3.9%), followed by a sharp 14% drop in November.

More worrisome is the expectation that exports, which support our economy, will worsen further next year as the global economy declines. IMF Managing Director Kristalina Georgieva recently gave a pessimistic forecast that global economic growth could fall to the 1% range next year. This is because the economies of Europe, the United States, and China are simultaneously slowing down. Since the IMF released its official forecast (2.7%) in October less than two months ago, this suggests the global economy is freezing at a rapid pace.

The conditions surrounding domestic demand also show no signs of improvement. The consumer price index slowed from 6.3% in July to 5.0% in November, but the core inflation rate remained at 4.8% in November following October, marking the highest level since February 2009 (5.2%) during the global financial crisis. Core inflation excludes seasonal and temporary factors and shows the long-term trend of prices, indicating that the high inflation trend may continue. The Bank of Korea's forecast for next year's inflation rate is 3.6%, significantly exceeding the Bank's inflation target of 2.0%. The OECD and IMF forecast 3.9% and 3.8%, respectively, suggesting that South Korea's inflation rate will approach 4% next year. With sharply rising prices and rapid interest rate hikes combined, consumers' real purchasing power will decrease, causing consumption, production, and employment to be hit in a chain reaction. Until this year, despite sluggish exports, private consumption and domestic demand have been supporting the economy, but next year both exports and domestic demand are expected to erode growth.

Various indicators such as production, consumption, and employment clearly point to an economic downturn. Production is a representative indicator. According to the industrial activity trend announced by Statistics Korea for October, total industrial production decreased by 1.5% compared to the previous month, marking the fourth consecutive month of decline. This is the largest decline in 30 months since April 2020 (-1.8%) when COVID-19 spread. Consumption also decreased for two consecutive months in September (-0.8%) and October (-0.7%). While the pace of job growth is slowing, KDI forecasts that the increase in the number of employed persons will shrink from 791,000 this year to 84,000 next year. Following the decline in growth rate, inflation, interest rates, and employment, the public's perception of the economy is inevitably worsening rapidly. Deputy Prime Minister and Minister of Economy and Finance Choo Kyung-ho has repeatedly mentioned that "the economic situation next year will be more difficult than this year," forewarning the coming economic winter.

Experts predict that South Korea will enter a full-fledged economic slowdown phase from the first half of next year and point out that both the government and the Bank of Korea need to prepare for a recession. However, since the impact is largely due to external factors, finding policy solutions is not easy. There are also calls for adjusting the pace of monetary policy.

Jung Kyu-cheol, head of the KDI Economic Forecasting Office, diagnosed, "Externally, the Chinese economic downturn, the Ukraine crisis leading to rising energy prices, and continued interest rate hikes are expected to make the economy more difficult." He added, "Internal risk factors include additional interest rate hikes if inflation is not controlled and the possibility of financial market tightening." He further stated, "Currently, all monetary and fiscal policy directions are focused on price stability, but since there is a high possibility of economic slowdown and inflation easing next year, it is necessary to adjust the pace of policies."