[2024 Economic Policy] "Domestic Demand is Key" Growth Rate Revised Down from 2.4% to 2.2%... Inflation Rate at 2.6%

Ministry of Economy and Finance '2024 Economic Policy Direction - Vibrant Livelihood Economy'

The government has lowered its economic growth forecast for this year from the initial 2.4% to 2.2%. This is similar to the projections of major institutions such as the Organisation for Economic Co-operation and Development (OECD) and the International Monetary Fund (IMF). Although exports, centered on semiconductors, are improving, private consumption and the sluggish construction sector are seen as factors holding back growth. Consumer prices are forecasted to rise by 2.6% this year. With international oil prices stabilizing and expected inflation declining, demand pressures are easing, leading to a gradual slowdown.

On the 4th, the Ministry of Economy and Finance announced in the '2024 Economic Policy Direction' that the economic growth forecast for this year is 2.2%, down 0.2 percentage points from the initial projection. Kim Byung-hwan, the first vice minister of the Ministry of Economy and Finance, diagnosed, "While the recovery in the export sector has begun, the consumption sector has weakened, and the burden in the construction sector is expected to affect this year." The government projected the current account surplus to increase significantly to $50 billion from $31 billion last year, but private consumption was lowered by 0.4 percentage points to 1.8%, and construction investment was revised down by 1.0 percentage point to -1.2%.

The government's growth forecast is similar to the 2% range projections made by major institutions: Bank of Korea at 2.1%, Korea Development Institute (KDI) at 2.2%, Korea Institute for Industrial Economics and Trade at 2.0%, OECD at 2.3%, and IMF at 2.2%. It is analyzed that economic growth will improve compared to last year (government 1.4%) due to the recovery in the semiconductor industry and improved exports.

The main factor limiting the economic rebound is the sluggish private consumption. According to Statistics Korea, the retail sales index (constant index), which reflects private consumption, decreased by 1.4% from January to November last year compared to the same period the previous year. This is the first decline in 20 years since 2003 (-3.1%) for the same period. High inflation, with consumer price indices rising over 3% for two consecutive years at 5.1% in 2022 and 3.6% last year, combined with high interest rates, has frozen consumer sentiment.

The construction sector is also contracting. Construction orders, a leading indicator of the construction economy (contracts between clients and construction companies to complete construction works), decreased by 11.1% in Q1, 31.5% in Q2, and 44.7% in Q3 last year. Amid a high-interest rate environment, the construction industry faces increased difficulties in financing, and high inflation has raised costs for raw materials and wages. The Ministry of Economy and Finance stated, "Difficulties centered on construction are expected," adding, "The high inflation and high interest rate environment restricts consumption capacity such as real income, raising concerns about worsening difficulties for small business owners and local economies."

The consumer price forecast was raised by 0.3 percentage points from the initial 2.3% to 2.6%. With international oil prices stabilizing, expected inflation is falling, easing demand pressures and leading to a gradual slowdown. Vice Minister Kim said, "Starting from around 3% inflation early this year, it is expected to converge to the low 2% range by the second half." He added, "In December last year, inflation was 3.2%, of which 0.4 percentage points were due to rising fruit prices," and said, "To stabilize fruit prices, we will take all-out inter-ministerial measures such as tariff exemptions and reductions at historically high levels to achieve early inflation in the 2% range."