1.4% Growth Rate Forecast, Lowest Level
Next Year Forecast Also Lowered to 2.3%
US Tightening Signals Imminent Recession
Delayed Effect of China Reopening
The Bank of Korea's decision to lower South Korea's GDP growth forecast for this year to 1.4% signifies the challenging domestic and international conditions surrounding the Korean economy. With a recession looming due to aggressive tightening by major countries like the U.S., the reopening effect of China's economy is delayed more than expected, and there are no significant factors driving economic growth aside from domestic demand, making it difficult to expect a recovery in growth rates in the second half of the year. Experts predict that even if the economy partially recovers in the latter half, it will be hard to escape the 'low growth' phase for the time being.
The newly forecasted growth rate of 1.4% by the Bank of Korea is among the lowest compared to major domestic and international institutions, except for the Korea Institute of Finance (1.3%) and Standard & Poor's (S&P, 1.1%). It is 0.1 percentage points lower than the 1.5% forecast, which was considered the 'main trend' by the Korea Development Institute (KDI), the Asian Development Bank (ADB), and Moody's this month, and matches the 1.4% forecast that held the majority in the Monetary Policy Committee poll conducted by Asia Economy. If this forecast holds, it will be the lowest growth rate recorded except during the 1998 Asian financial crisis (-5.1%), the 2009 financial crisis aftermath (0.8%), and the 2020 COVID-19 outbreak (-0.7%). The Bank of Korea also lowered its growth forecast for next year from 2.4% to 2.3%, a 0.1 percentage point decrease.
The main reason South Korea has fallen into a low-growth trap is analyzed to be the delayed economic recovery in China, which has the greatest impact on South Korea's exports and growth. Recently, China's production, consumption, and investment have all fallen short of expectations, compounded by the negative 'Pochi' event where the yuan broke the 7 yuan per dollar level. When China's economy and the yuan are unstable, it inevitably leads to a rise in the won-dollar exchange rate and a deterioration of the current account balance. In particular, the U.S. is requesting restraint on expanding semiconductor sales to China, the largest market for South Korean semiconductor exports, as part of its participation in regulations against China, making it difficult even to maintain market share.
It is also difficult to expect an expansion of government fiscal spending to drive economic growth. Already, national tax revenue in the first quarter of this year decreased by 24 trillion won compared to last year, and many analyses suggest that annual tax revenue will fall short of initial forecasts. The government is concentrating fiscal spending in the first half of the year, anticipating a 'high-low' economic trend, so fiscal capacity in the second half is limited. Considering the fiscal soundness policy of the Yoon Suk-yeol administration, it is also not easy for the government to prepare supplementary budgets to revive the economy.
If the Chinese economy begins to recover in earnest from the second half of the year, it could help South Korea's growth rate recovery, but from a structural economic perspective, it is analyzed that it will be difficult to escape low growth in the 1-2% range for a considerable period. Professor Heo Jin-wook of Incheon National University's Department of Economics explained, "Due to changes in population structure, it is inevitable that South Korea's potential growth rate will decline," adding, "After the year after next, an average growth rate in the mid-to-high 1% range is likely." Professor Kang Sam-mo of Dongguk University's Department of Economics emphasized, "Aging and low birth rates negatively affect recessions and potential economic growth rates," and "In such circumstances, to promote growth recovery, the only way is to deregulate and encourage corporate investment to improve economic efficiency."
Core Inflation Variables Declining Slowly
Although the overall inflation trend is expected to slow, leading the Bank of Korea to hold interest rates steady for three consecutive times this month, the fact that inflationary pressures have not completely subsided remains a major variable for future monetary policy. Contrary to market expectations of a slight downward revision in this month's economic outlook, the Bank of Korea maintained this year's inflation forecast at 3.5%. The inflation forecast for next year was lowered from 2.4% to 2.3%.
Experts point out that while inflation is expected to ease in the second half of this year, reducing inflationary pressure, the core inflation trend is slowing down more gradually than expected, which is a key variable for future inflation paths. Since the government raised electricity rates by 8 won per kWh and city gas rates by 1.04 won per MJ (megajoule) starting from the 16th, there is a view that the impact of public utility price hikes on inflation needs to be closely monitored. Park Seok-gil, an economist at JP Morgan, said, "Although the annual overall impact of electricity and gas rate hikes on inflation may be diluted, the ripple effect of public utility prices on overall inflation is not insignificant," adding, "As domestic demand growth stabilizes in the second half, price pressures from the demand side will gradually ease, so the inflation rate itself is expected to decline, but the slow pace of decline in core and service inflation rates is a part that cannot be overlooked in monetary policy."
Inside and outside the government, there is analysis that the electricity and gas rate hikes will raise this year's consumer price inflation by 0.1 percentage points, but since the increase in public utility prices could intensify upward pressure on service prices, there is a view that future trends must be closely watched. Kim Jeong-sik, emeritus professor of economics at Yonsei University, said, "Uncertainties remain in international oil prices, raw material prices, and agricultural and marine product prices, and the psychological effect of public utility price hikes is expected to be significant," adding, "Although electricity rates have been adjusted, the situation is insufficient, and there is still a possibility of further increases."
With the Bank of Korea holding interest rates steady for three consecutive times and lowering this year's economic growth forecast to the lowest level among domestic and international institutions, some predict that the Bank of Korea could begin cutting interest rates as early as this year. Moon Hong-chul, a researcher at DB Financial Investment, said, "If the Bank of Korea is to start cutting rates as early as this year, it must at least give some signals to the market in the first half of the year," adding, "With the growth rate lowered to 1.4% and the second half economic recovery expected to be slower than anticipated, the timing of rate cuts will be gradually weighed." On the other hand, with U.S. monetary policy, won-dollar exchange rate trends, and financial instability remaining major variables for monetary policy, there is also a view that the U.S. will cut rates first. Jo Young-moo, a research fellow at LG Economic Research Institute, said, "Although the Korea-U.S. interest rate gap has widened to a record 1.75 percentage points, the won has not weakened significantly, and foreign capital outflows have not fully materialized," adding, "If South Korea cuts rates before the U.S., the interest rate gap will widen further, so South Korea will wait to see the U.S. cut rates first before lowering its own."
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