South Korea is expected to confront tough economic conditions in 2023, as weakening exports, coupled with global recession woes, could undercut the country’s growth momentum, even as prices are forecast to increase at a slower pace.
Major economic agencies at home and abroad predicted the country’s economic growth rate will be limited to the 1 percent range next year, raising concerns about an economic slowdown.
The underlying reasons for a gloomy outlook involve stubbornly high inflation depressing domestic consumption, a trend that is likely to last through the second half of next year, as well as the global economic downturn that is eroding the country’s exports.
The ASEAN+3 Macroeconomic Research Office, or AMRO, recently projected that South Korea’s economic growth rate will stand at 1.9 percent. The figure is in line with other forecasts by the Organization for Economic Cooperation and Development (1.8 percent), the Korea Development Institute (1.8 percent), the Korea Institute for Industrial Economics and Trade (1.9 percent) and Fitch (1.9 percent).
On Dec. 14, the Asia Development Bank slashed its outlook for South Korea’s economic growth for next year to 1.5 percent, down from its September forecast of a 2.3 percent rise.
The Bank of Korea’s projection for next year is 1.7 percent, reflecting a mix of local and overseas factors, including Russia’s ongoing war in Ukraine and high energy prices as oil producers cut production.
On Tuesday, BOK Gov. Rhee Chang-yong told reporters in a briefing that the economic conditions will be “very challenging” in the first half of next year. The country’s economy is now standing at the “borderline” of a recession, he said, adding that grounds for an imminent recession are not clear yet.
Concerns over inflation continue to weigh on financial policymakers here. The central bank said in a report that the country’s inflation will likely grow around 5 percent “for the time being,” even though the upward pace will slow down. Until November this year, inflation had risen 5.1 percent on average, the central bank said.
To fight inflation, the BOK raised its policy rate by a quarter percentage point to 3.25 percent on Nov. 24. But it slowed the pace of inflation hikes from a “big step” 0.5 percentage-point increase in October, as more signs of economic slowdown appeared in recent months.
Exports, a key growth driver shoring up the Korean economy, are feared to lose steam considerably next year. The country’s exports performed solidly this year, but the trade deficit is snowballing at a rapid pace due to a sharp increase in energy prices. The trade deficit for the first 11 months of 2022 totaled $42.6 billion, which surpassed a previous record shortfall in 1996.
According to a recent report from the Federation of Korean Industries, 150 respondents -- mostly export-oriented companies in key sectors such as semiconductors and the automotive industry -- said exports would inch up by 0.5 percent on average next year, citing high commodity prices, economic slowdowns in other countries and higher logistics costs.
The FKI said exports had led the country’s economic growth since the pandemic broke out, but the outlook for exports weakening warrants a new set of government policies designed to support an export drive.
The Hyundai Research Institute issued a report Sunday predicting that a combination of economic slowdown and high prices, which it calls “slowflation,” will continue for a while. The research institute noted that the country’s core inflation, excluding volatile food and energy prices, is expected to remain at a high level, while inflation expectations also hover over 4 percent.
In a briefing on Monday, Deputy Prime Minister and Minister of Economy and Finance Choo Kyung-ho said the government would focus on stabilizing prices and offering more incentives to shore up exports and investment. The administration’s grasp of economic challenges ahead appears largely set in the right direction. What matters, however, is whether policymakers will actually push for what they call “bold” measures to deal with stronger headwinds next year.
