[Asia Economy Sejong=Reporter Dongwoo Lee] The Korea Development Institute (KDI) forecasted that the domestic economic growth rate for the first half of this year will remain at 1.1%, down 0.3 percentage points from the previous projection. While the annual economic growth rate forecast for this year remains unchanged at 1.8%, it expects a deeper slowdown in the economy during the first half of the year.
On the 9th, KDI revised its 2023 annual economic growth rate to 1.8%. Although the annual growth rate forecast remains the same as the figure announced in November last year, the first half growth rate was lowered from 1.4% to 1.1%, a 0.3 percentage point drop, while the second half was raised from 2.1% to 2.4%, a 0.3 percentage point increase. KDI’s domestic economic growth rate forecast is higher than those of the government (1.6%), Bank of Korea (1.7%), Asian Development Bank (ADB, 1.5%), and International Monetary Fund (IMF, 1.7%), and is the same as that of the Organisation for Economic Co-operation and Development (OECD, 1.8%).
KDI explained the revision of the economic growth rate by stating, "The reopening of China’s economic activities is accompanied in the short term by a rapid spread of infectious diseases and the resulting contraction of the Chinese economy, so the growth of our economy in the first half of this year is expected to fall short of the previous forecast. However, the rebound of the Chinese economy in the second half will positively affect our exports."
Private consumption is expected to grow at a lower rate of 2.8%, compared to the previous forecast of 3.1%, reflecting a decrease in real income due to public utility fee increases. Facility investment was slightly revised upward from 0.7% to 1.1%, reflecting improved external conditions, but construction investment is expected to show a trend similar to the previous forecast.
Exports were revised upward from 1.6% to 1.8%, as the reopening of China’s economic activities leads to an increase in foreign tourists, boosting service exports. Regarding the current account balance, reflecting the upward adjustment of export growth and improved terms of trade due to falling international oil prices (widening decline in import prices), the surplus is expected to increase from $16 billion to $27.5 billion. The first half surplus was revised downward from $7.4 billion to $1.7 billion, reflecting deteriorating external conditions, while the second half surplus is expected to increase from $8.6 billion to $25.8 billion due to global economic recovery.
The consumer price inflation rate was revised upward from 3.2% to 3.5%, despite the downward adjustment of international oil prices, as last year’s supply-side price pressures are expected to be reflected with a time lag through public utility fee increases. The core inflation rate (excluding food and energy) was also revised upward from 3.3% to 3.4% due to the ripple effects of public utility fee hikes.
However, there are external variables affecting the economic growth forecast. If China’s economic recovery remains moderate or if the high inflation trend continues, leading to sustained interest rate hikes in the U.S., the domestic economic recovery could be delayed. KDI noted that since the main driver of the economic rebound in the second half is China’s recovery, if China fails to sufficiently control infectious disease outbreaks or if the downturn in China’s real estate market impacts the economy, export recovery could be delayed, causing our economic growth to fall short of the forecast. Additionally, if the decline in inflation is limited due to worsening situations such as the Ukraine crisis, and if monetary policy tightening intensifies mainly in the U.S., financial market instability could restrict the global economic recovery.
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