ANALYSIS 3 percent GDP growth unlikely in 2022

People line up to get tested for the coronavirus, at a public health center in Seoul, Dec. 15. Yonhap

By Lee Min-hyung

• Published Dec 16, 2021 5:17 PM KST
• Updated Dec 21, 2021 8:55 AM KST

Renewed virus fear, weakening export growth major risks for Korean economy

By Lee Min-hyung

The Korean economy is unlikely to achieve its GDP growth target of 3 percent in 2022, as a resurgent spread of the coronavirus here and abroad will weaken export growth and hinder recovery in domestic consumption, economists said.

This prediction is not in line in with the optimistic reports released by the major financial institutions. The Bank of Korea (BOK) maintains the nation's GDP growth forecast next year at 3 percent, and the assessments of overseas institutions ― such as the International Monetary Fund and the Asian Development Bank ― also hover over 3 percent.

But with Korea grappling with the aftermath of the introduction of the “Living with COVID-19” strategy, local private research institutions have begun sharing a pessimistic outlook on the nation's GDP growth for 2022.

Of particular and imminent concern are growing fears of a hawkish turn by the U.S. Federal Reserve and the BOK. The Korean central bank has already pushed key rate hikes twice in three months as of November, and will do so at least once more as late as February amid widening inflationary pressure on the Korean economy.

The Fed is also scheduled to take a similar path, with Chairman Jerome Powell repeating his strong signal for ending tapering and possibly sending signals for a rate hike soon. The prevalent outlook is that the Fed will start raising its benchmark rate at least once by around mid-2022 for similar reasons as the BOK.

As the steep rise of the key rate will affect the livelihood of households here, there are fears that the hike will weaken the recovery in private consumption. The unceasing pandemic spread also increases the likelihood for the government to keep reinforcing social distancing measures. This situation raises concerns that the Korean economy may drift back into the doldrums again.

Since the government introduced its “Living with COVID-19” strategy last month, the number of infections has been rising steeply. The country reported daily COVID-19 cases of more than 7,800, Dec. 14, setting a new record high. In response, the government recently decided to adopt stricter social distancing measures for 16 days from Dec. 18 by limiting the operating hours of restaurants and reducing the size of permitted private gatherings.

Aside from the pandemic, economists argue that sluggish export growth could become one core reason behind Korea's weaker-than-expected GDP growth next year.

Korea's monthly exports topped $60 billion for the first time in November, and the nation's exports achieved double-digit growth for 13 consecutive months until last month, according to data released from the Korea Customs Service. But the growth momentum will not persist next year, local economists said.

“Exports have been able to achieve a strong recovery from the pandemic-sparked recession, but the momentum will lose steam in 2022 amid lingering uncertainties over the global investment cycle and market liquidity conditions,” Nomura Securities' Chief Economist Park Jung-woo said.

The uncertainties are widening at a time when global central banks are on track to drop their pump-priming measures, so skepticism is growing over the Korean economy recovering solidly next year, according to the economist.

“The market consensus is that the BOK will push for rate hikes at least twice in 2022, but the central bank is expected to face a tough time in doing so amid the downward pressure on GDP growth forecasts,” he said.

Economic research institutions in the private sector are also revising down their growth outlook, citing the aforementioned reasons.

The Hyundai Research Institute forecast the Korean economy to achieve growth of 2.8 percent next year. The outlook is on par with those of the LG Economic Research Institute and Hana Institute of Finance.

In a recent report, the LG Institute also predicted Korea's export-driven economic growth would lose steam next year, as demand for non-face-to-face IT products will not grow as rapidly as it has been since the outbreak of the pandemic. The research institute even left open the possibility that the economy could drift back into a trap of low growth, at less than 2 percent after 2023.

Hanwha Investment & Securities economist Lim Hye-yoon also underscored that the economy should brace for sluggish growth sparked by weak exports.

“Korea's exports in December are expected to achieve growth of less than 20 percent from the previous year, amid weakening base effects and a drop in oil prices,” the analyst said.

Exports have reported outstanding growth throughout 2021 on the base effects from the pandemic-sparked recession last year. Exports grew by 16.7 percent and 24 percent in October and November, respectively, from the previous year, according to data from the customs office.

Lim also said that export growth in December might fall below 10 percent if the Omicron variant poses a major threat to the normalization of economic activities in major countries.

“It is highly likely that the growth momentum of exports will slow down throughout 2022, and our outlook is that exports will not be able to achieve as solid growth as that of this year.”