Korea's 2023 growth forecast cut to 1.8 percent by KDI

The new projection is much lower than the state-run think tank's 2.3 percent forecast released in May and is much lower than the government's 2.6 percent, the Bank of Korea's 2.1 percent and the International Monetary Fund's 2 percent.

Korea Development Institute researchers, from left, Kim Ji-yeon and Jung Kyu-chul announce the think tank's economic forecast on Nov. 8 at the government complex in Sejong. [YONHAP]

The economy will grow 1.8 percent next year, according to a forecast released Thursday by the Korea Development Institute (KDI).

It would be the slowest growth since the 0.7 percent contraction in 2020 during the height of the pandemic.

The new projection is lower than the state-run think tank's 2.3 percent forecast released in May and lower than the government's 2.6 percent, the Bank of Korea's 2.1 percent and the International Monetary Fund's 2 percent.

According to the KDI, inflation will likely decelerate with the stabilization of crude oil prices.

“While consumer spending will likely continue a recovery, exports and investment are expected to struggle due to slowing global economic growth and rising interest rates,” said Jung Kyu-chul, KDI researcher.

The KDI researcher noted the slow growth would not qualify as economic stagnation.

“We expect a sharp slowdown in the first half,” Jung said. “But as we approach the second half, we expect a gradual recovery.”

The KDI is forecasting 1.4 percent growth in the first half and 2.1 percent in the second half. It projects consumer spending to increase 3.1 percent in 2023, which would be lower than 2022's 4.7 percent.

While spending is expected to grow as the world has moved on from Covid-19 and social distancing regulations, inflation and interest costs are seen holding the economy back.

The KDI projects inflation at 3.2 percent — 4 percent in the first half and slowing to 2.5 percent in the second half.

Earlier it projected 2.2 percent for 2023.

“While it is above the government’s inflation target of 2 percent, we expect it to fall to the 2-percent range in the second half,” Jung said, noting higher-than-expect energy and grain prices.

Inflation is expected to come in at 5.1 percent this year.

Exports are expected to grow 1.6 percent next year, declining 0.1 percent in the first half and rising 3.2 percent in the second half.

Imports are expected to grow 2.8 percent, 2.8 percent in the first and second half.

The current account balance is expected to fall to $16 billion from this year’s $23 billion.

Employment growth will be weak.

“The shrinking labor force could lead to a lowering of our economic growth,” said Kim Ji-yeon, a KDI researcher.

Finance Minister Choo Kyung-ho has been warning that the economic situation could be difficult next year.

He asked lawmakers to help the government counter the increasing headwinds while signaling confidence to the market by passing the government’s proposed 2023 budget by Dec. 3.

“The market is reacting sensitively even at the slightest uncertainty,” Choo said. “If the budget is firmed up, we will be able to take necessary action.”

He stressed that Korea is currently facing a complex crisis with the strong dollar and the rising interest rates.

“As the factors from overseas and structural problems overlap, the difficulty our economy faces could continue for an extended period,” Choo said.

The government is proposing a 639 trillion won budget for next year. This is smaller than the 679.5 trillion won budget for this year, including the two supplementary budgets already passed.

It is the first budget cut since 2010.

BY LEE HO-JEONG [lee.hojeong@joongang.co.kr]