Korea Capital Research Institute Forecasts 1.9% GDP Growth... "Caution on PF"

Seminar on 'Capital Market Outlook and Key Issues' on the 25th

On the 25th, the Korea Capital Market Institute forecasted that South Korea's real Gross Domestic Product (GDP) growth rate will record 1.9% this year amid widespread concerns about the slowdown in the real economy due to real estate project financing (PF) defaults.

At the 'Capital Market Outlook and Major Issues' seminar held at the Financial Investment Center in Yeouido, Seoul, Shin Jin-young, President of the Capital Market Institute, stated, "Despite economic recovery prospects this year, the Israel-Hamas war and the US-China trade dispute will increase economic uncertainty."

President Shin pointed out, "In particular, the domestic real estate PF defaults that emerged from the second half of 2022 could negatively impact not only the creditworthiness of the construction sector but also the soundness of financial institutions, requiring special caution."

Baek In-seok, Head of the Macro-Finance Department at the Capital Market Institute, said in his keynote presentation, "South Korea's GDP growth rate is expected to be 1.9% this year due to improvements in IT sector exports and recovery in private consumption." This figure is lower than the government’s forecast of 2.2% and the Bank of Korea’s 2.1%. The International Monetary Fund (IMF) and the Organisation for Economic Co-operation and Development (OECD) have also projected 2.2% and 2.3%, respectively.

The Capital Market Institute expects the consumer price inflation rate to slow to around 2.7% this year as the rise narrows in the second half due to stabilization in international raw material prices. Accordingly, Baek explained that the base interest rate will be cut twice in the second half, lowering it to about 3.0% by the end of the year.

However, he pointed out, "The risk from real estate PF is a key risk factor for the domestic economy," adding, "Since the profitability of real estate PF is still deteriorating and construction delays continue, the construction industry may contract, worsening the real economy."

Regarding the US economy, it is expected to achieve a soft landing with a solid employment environment, recording a GDP growth rate of 1.6%. With housing market stabilization and an inflation rate (2.3%) approaching the Federal Reserve's (Fed) target, the Fed is projected to cut the base interest rate by 100 basis points (1bp = 0.01 percentage points) this year, lowering it to around 4.5%.

Baek added, "While the market expects the US to start cutting interest rates from the first quarter, the Fed’s data-dependent monetary policy approach suggests there may be some delay."