Growth Forecast Downgraded to 1.4% This Year [Second Half Economic Policy]

2023 Second Half Economic Policy Direction
Annual Growth Rate Forecast Down 0.2%P
Expecting Rebound with Export Improvement in Second Half

The government projected South Korea's economic growth rate for this year at 1.4%. This figure is a 0.2 percentage point downward revision from the forecast of 1.6% made in December last year. Although the annual growth rate is expected to slightly decline from the initial estimate due to a slowdown in overall export performance, it is anticipated that growth will rebound significantly in the second half of the year, supported by improvements in private consumption and semiconductor exports.

On the 4th, the Ministry of Economy and Finance announced the "2023 Second Half Economic Policy Direction," which includes this year's economic growth and inflation forecasts. The government's projected economic growth rate is among the lowest alongside the Bank of Korea among major domestic and international institutions. Previously, the Organisation for Economic Co-operation and Development (OECD), International Monetary Fund (IMF), and Korea Development Institute (KDI) all revised their forecasts for South Korea's economic growth this year to 1.5%.

The government’s lower economic growth forecast compared to major domestic and international institutions reflects the judgment that although the global economy is expected to improve due to inventory adjustments in manufacturing and recovery in IT demand, downside risks such as financial market instability caused by monetary tightening and geopolitical risks still persist. Bang Ki-seon, the first vice minister of the Ministry of Economy and Finance, said, "Considering the economic trends in the first half of the year, we objectively evaluated the decline in exports and investment compared to initial expectations."

This year, consumer prices are expected to rise by 3.3% compared to the previous year, which is 0.2 percentage points lower than the previous inflation forecast of 3.5%. This is attributed to the stabilization of international raw material prices such as energy and grains, and improvements in agricultural crop yields, leading to a faster-than-expected slowdown in inflation. The government stated, "The inflation slowdown trend is expected to continue due to the sustained stability of international oil prices and a decline in inflation expectations."

Private consumption is expected to increase by 2.5%, the same as the previous forecast, rebounding mainly in face-to-face service industries following the lifting of quarantine measures. Facility investment is forecasted to decline by 1.2%, a slight improvement from the previous forecast of -2.8%.

The current account surplus forecast for this year is expected to be $23 billion, exceeding the year-end forecast of $21 billion by $2 billion. At the end of last year, the expected decreases in exports and imports were 4.5% and 6.4%, respectively, but this time they are projected at 6.6% and 8.6%, respectively. The export decline is 2.1 percentage points larger, and the import decline is 2.2 percentage points larger. For exports, automobiles and secondary batteries are expected to continue driving exports in the second half, while semiconductor exports are anticipated to improve after going through an inventory adjustment process.

The current account surplus is expected to improve significantly from $23 billion this year to $45 billion next year, and the goods balance is projected to increase substantially from $18 billion this year to $58 billion next year.

The number of employed persons this year is expected to increase by about 320,000 compared to the previous year, leading to a 0.4 percentage point rise in the employment rate, while the unemployment rate is forecasted to decrease by 0.2 percentage points. The number of employed persons is expected to increase by 180,000 next year.