KERI Expects Economy to Grow 1.5% in 2023, “We’re Entering a Recession”

Citizens shop for groceries at Gyeongdong Market in Dongdaemun-gu, Seoul. Mun Jae-won

The Korea Economic Research Institute (KERI), affiliated to the Federation of Korean Industries (FKI), announced its outlook for the nation’s economy on February 3 and expected the economy to grow only 1.5% due to falling demand and the global economic slowdown.

On Friday, KERI released its Economic Trends and Outlook, in which the research institute lowered its prospect for South Korea’s economic growth this year by 0.4% from the previous 1.9%. Last year, KERI had predicted the economy to grow 1.9%, but lowered its outlook after reflecting the sudden shrinking of the economy at the end of last year. The latest prospect of 1.5% is lower than the 1.7% released by the International Monetary Fund (IMF).

KERI could not find any momentum to drive domestic growth and overcome the global economic slowdown and expects the nation’s economy to enter a recession this year.

Lee Seung-seok, a researcher at KERI said, “If the U.S. Federal Reserve maintains its radically tight monetary policy or if excessive debt in the private sector triggers a crisis in the financial market, the economy may slow down even further,” and explained, “The government has less room for policy support due to excessive spending in response to Covid, so it was inevitable to lower the economic outlook.”

Private spending, the biggest portion of domestic demand, is expected to grow by just 2.4%. This is 2.0% lower than the growth in private spending last year (4.4%).

In particular, KERI expected spending to shrink drastically this year due to a combination of factors, such as smaller revenues for self-employed business owners and the burden of loan repayments on household debt as well as the actual decline in purchasing power due to higher prices and falling consumer confidence due to the economic slowdown.

Despite aggressive investment in the semiconductor sector, capital investment will drop 2.5% as higher interest rates make it costlier for companies to obtain capital. Investment in construction is also expected to drop 0.5% because of setbacks caused by the soaring price of raw materials. Consumer prices are expected to rise by 3.4%, 1.7% lower than last year, as the international price of raw materials gradually stabilize after the first half of this year and as the strong dollar weakens.

Due to the sluggish export of semiconductors, the outlook for exports remained at 1.2%, 1.9% lower than the export growth last year (3.1%).

The current account is expected to drop significantly to 14.5 billion dollars because of a bigger deficit in the service account. Lee said, “If the economy in China, the top importer of South Korean goods, slows down further than expected or if our main export items other than semiconductors fail to perform at expected levels, exports could slow down even further.”