KDI cuts 2021 growth outlook, citing sluggish domestic recovery

South Korea’s economy will contract 1.1 percent this year amid the COVID-19 fallout and rebound to 3.1 percent growth in 2021, state-run think tank Korea Development Institute said Wednesday.

In its latest revision, KDI maintained its outlook for this year at its previous September figure but cut the prospect for next year’s growth by 0.4 percentage point, citing the slower-than-expected recovery pace of the domestic market.

“Our economy is expected to expand 3.1 percent (on-year) in 2021 as the domestic market’s recovery remains limited, partly offsetting the improvements in exports,” the institute said through its biannual outlook report.

The suggested figure, down 0.4 percentage point from KDI’s tentative figure in September, largely reflected the prolonged impact of the second epidemic flare-up which swept across the country from late August.

“We have lowered the growth outlook for next year, taking into account that the second wave of infections here and across the world is likely to last,” said Jung Kyu-chul, economic outlook director at KDI.

In May this year, in the wake of the first round of the epidemic craze in February-April, the think tank had suggested that the Korean economy will likely expand 0.2 percent on-year in 2020. The figure could dip as low as minus 1.6 percent in the worst case, depending on the COVID-19 situation development, it added.

While the second epidemic flare-up added fuel to fire of the pessimistic growth scenario, it was the government’s expansionary fiscal actions that resuscitated the struggling economy, according to KDI.

So far this year, Asia’s fourth-largest economy has effectuated four sets of extra budgets worth a combined 66 trillion won ($59.4 billion) to cushion the fallout of the unprecedented epidemic crisis.

Private consumption, according to KDI analysis, will shrink 4.3 percent this year and log 2.4 percent growth next year. Facility investments, in contrast, will expand 6 percent this year and 4.7 percent next year, on the back of improved exports and manufacturing recovery.

Exports -- the key pillar in Korea’s trade-reliant economy -- will contract 4.2 percent this year but rebound to a 3.1 percent growth next year. The current account surplus, however, will slip to $57.9 billion next year from the anticipated $62.4 billion this year, due to increased imports.

Consumer inflation will continue to remain in the range below 1 percent, lingering at 0.5 percent this year and rising slightly to 0.7 percent next year.

The nation’s jobless rate was speculated at 4 percent for this year and 4.1 percent for next year.

“Our outlook revision was based on the premise that the global economy will phase out of the extreme recession this year and enter a slow recovery trend next year,” the KDI said.

“Should valid cures and vaccines (for COVID-19) be distributed in time, the recovery may pick up some speed.”

The latest KDI report did not reflect US pharmaceutical company Pfizer’s latest announcement that it has come a step closer to providing a working COVID-19 vaccine, it added.

“In case the US and China tension escalates into an all-out confrontation, the global market sentiment will contract and consequently dampen the Korean economy’s growth momentum.”

By Bae Hyun-jung (tellme@heraldcorp.com)