Lee Yeon-woo is a financial journalist at The Korea Times. Her wide range of reporting includes policies, macroeconomics, stock market, companies and even crypto. She is passionate about connecting the dots in Korean finance and making it easier for foreign nationals to understand. Based on her previous experience as a national reporter, she also has a keen interest in social issues within the sector, including gender equality and ESG. Your tips and insights are always appreciated. You can send them to yanu@koreatimes.co.kr.
Growth forecasts dip as high rates, inflation weigh on Korean economy
A store closure notice is posted at a shop in a traditional market in Seoul, June 30. Yonhap
By Lee Yeon-woo
Timing of interest rate cut becomes key variable
Economic forecasts for Korea in 2024 are being downgraded as domestic demand struggles to rebound amid persistently high interest rates and inflation. The timing of a key interest rate cut is considered a crucial variable that could determine growth in the remaining months, according to experts, Sunday.
The most recent downgrade came from the government-run Korea Development Institute (KDI). In its revised economic outlook announced on Thursday, the KDI lowered its 2024 growth forecast from 2.6 percent to 2.5 percent, citing sluggish domestic demand.
"The Korean economy is projected to experience a slight delay in recovery compared to previous projections, as domestic demand is likely to remain subdued while export growth is expected to surpass earlier forecasts," it wrote.
The report noted that private consumption is forecast to expand by 1.5 percent, down from the previous projection of 1.8 percent. Facility investment is expected to grow by only 0.4 percent, significantly below the earlier forecast of 2.2 percent.
The KDI's projection aligns with those of global investment banks (IBs) and the domestic brokerage industry.
Following the announcement regarding the second quarter for gross domestic product, eight global IBs lowered the projection to 2.5 percent, a 0.2 percentage point decrease from one month ago. Similarly, the Korean brokerage industry has adjusted its forecasts downward from the upper 2 percent range to the mid 2 percent range.
"A critical factor for the Korean economy in the second half of the year will be whether the momentum spreads to the domestic sector," Hana Securities economist Chun Kyu-yeon said.
This contrasts with earlier expectations of an economic recovery, which were bolstered by a rebound in exports. Although the country's current account surplus reached a 7-year high in June, the strength in exports failed to translate into a recovery in domestic demand.
"The export recovery has been concentrated in specific sectors like semiconductors, automobiles, and shipbuilding. This uneven recovery has contributed to weak facility investment," Hi Investment & Securities researcher Park Sang-hyun said.
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"The pressures of high interest rates and inflation, coupled with a slowdown in the labor market, are limiting the recovery of the consumption cycle," Park added.
The policy rate, which had fallen to 0.5 percent in May 2020 during COVID-19, has steadily risen since August 2021, reaching 3.5 percent by last January, where it has remained.
While the need for the Bank of Korea (BOK) to lower the base interest rate has grown, the sharp increase in real estate prices, especially in the Seoul area, is complicating efforts to implement an early rate cut.
After the monetary policy decision in July, BOK Governor Rhee Chang-yong stressed that the pace of real estate price increases has been faster than anticipated, and cautioned that reducing household debts over the medium to long term remains essential.