1.6 percent growth forecast for Korea in 2023

If the projection holds, 2023 will likely be the second year of decelerating growth. This year, the economy is forecast to grow 2.5 percent after last year's 4.5 percent.

Finance Minister Choo Kyung-ho, center, announces next year's government economic plan at the government complex in Seoul on Wednesday. [YONHAP]

Korea's economy will grow 1.6 percent next year, according to the latest forecast from the Finance Ministry, as the country faces strong economic headwinds and uncertainty globally.

The outlook is lower than those previously published by international organizations, including the IMF and the OECD.

If the projection holds, 2023 will likely be the second year of decelerating growth. This year, the economy is forecast to grow 2.5 percent after last year's 4.5 percent.

The government is expecting weaker exports and investment, which will affect employment. Exports are expected to decline 4.5 percent in 2023, after this year's rise of 6.6 percent.

This would be the first year-on-year decline since 2020, the year the pandemic hit Korea.

Facilities investment next year is expected to shrink 2.8 percent, faster than this year’s 1.8 percent. Inflation is expected to remain above 2 percent, at 5.1 percent this year and 3.5 percent this year.

Costs for households are seen rising due to an increase in utility charges in the first half of 2023. They have been kept artificially low to the point of threatening the financials of public utilities.

Kepco is forecast to report an operating loss 30 trillion won this year, a record.

Due to the slowing economy and high inflation, people are expected to cut back on spending, with consumer spending expected to rise 2.5 percent in 2023, down from 4.6 percent projected for this year.

Hiring will become more difficult. In 2023, employment will increase by 100,000, down from this year's 810,000.

“The government so far has focused its policy capacities on stabilizing average livelihoods against the complex economic crisis of high inflation, high interest rates and the appreciation of the dollar,” said Finance Minister Choo Kyung-ho. “Yet the internal and external conditions that our economy faces is still extremely difficult.”

“The speed at which our economy, that has high external dependency, will fall will become faster,” Choo said.

Interest costs could increase for households, as the Bank of Korea is signalling higher rates.

Central bank governor Rhee Chang-yong told reporters that the Korean economy is facing a possible recession. The risk of stagflation is increasing.

Yoon Suk-yeol's government is focusing its economic policies on risk management and avoiding a liquidity crunch.

“We will push for front-load spending in the first half while still within the bigger frame of sound fiscal management while expanding the government’s policy-backed financing to a record size of 540 trillion won from 495 trillion won earlier for companies,” Choo said.

The government will be providing at least 50 trillion won of support for the bond market and passing tax benefits supporting the debt markets as it lowers taxes for people owning multiple homes.

A change of this sort would require the support of the Democratic Party, which holds a majority of seats in the National Assembly and is at odds with President Yoon and his People Power Party.

To help exports, the government will support $50 billion of projects, including those related to nuclear energy and defense.

“Tailored” financial support will be expanded through 360 trillion won in trade finance, a record size. A temporarily tax credit on investments in major strategic technologies will be raised to 10 percent from current 3 to 4 percent.

To help households, the government will slow the increase in utility rates and cut certain tariffs. It is also pushing for extended holidays.

“It is on the level of guaranteeing the people’s right to take a break,” Choo said.

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