Korea Development Institute lowers Korea’s growth outlook to 1.5% for this year

Jeong Gyu-chul, director at the KDI, right, announces economic outlook on May 11. [Photo by Yonhap]

The state-run Korea Development Institute (KDI) on Thursday revised down its forecast for South Korea’s economic growth this year to 1.5 percent from 1.8 percent projected three months earlier amid the ongoing sluggish semiconductor exports.

According to the first-half economic outlook announced by the KDI, Korea’s economy is projected to grow 1.5 percent this year, down 0.3 percentage points from its earlier outlook in February. The forecast is lower than the 1.6 percent estimate of the Ministry of Economy and Finance and the Bank of Korea.

The bleak outlook comes as the slowdown in the private sector continues with exports and investments in the chips business, Korea’s key export item, remaining sluggish to drag down the entire economy.

“The chip industry slowdown is near the level during the dotcom bubble crash in 2001 and the global financial crisis in 2008,” said Jeong Gyu-chul, director at the KDI.

“The Korean economy had been predicted to start weak and end strong, but it is likely to remain weak in the second half as well.”

Jeong added that “the growth rate can go down to the low-1 percent range under the scenario that chips continue to perform weakly.”

Indices show how the chip sector is struggling.

The inventory level of chips remains at an all-time high amid a sharp decline in global demand.

According to Statistics Korea, the chip inventory ratio in the first quarter was 212.4 percent, exceeding that in the Asian financial crisis in 1997 and the global financial crisis in 2008. It is only slightly lower than the 232.7 percent during the IT bubble burst in the third quarter of 2001.

The chip sector, in the meantime, is projected to bottom out in the second half of this year, according to the KDI.

[Photo by MK DB]

The institute said that the “indices such as replacement frequency of chips-related products show that it will hit the bottom in the second and third quarters.”

However, it added that the recovery may be slow next year due to the mounting risk of geopolitical conflicts. The KDI still saw that the Korean economy will start recovering once the chip business bottoms out in the second half.

The growth rate in the first half may be low at 0.9 percent but more than double to 2.1 percent in the second half, it said.

Inflation, in the meantime, is projected at 3.4 percent this year, 0.1 percentage point lower than the previous forecast. KDI sees that inflation is easing as pressures from producer prices slow, such as the downward trend in import prices.

Inflation was projected to drop to 2.4 percent next year. The institute, however, stressed that core prices are still high and monetary tightening must be kept for the time being for price stability.

The KDI expected crude oil import prices based on the Dubai crude to continue to decline this year to the level of $76 per barrel.

The forecast for gross export growth was revised down to 1.4 percent from 1.8 percent due to sluggish global demand for chips. The current account balance forecast was also lowered to a surplus of $16.4 billion from $27.5 billion due to contracted exports.

According to the Korea Customs Service on Thursday, exports stood at $14.5 billion in the first 10 days of May and imports $18.7 billion, a decline of 10.1 percent and 5.7 percent, respectively, from a year ago. Trade deficit reached $4.2 billion.

Chip exports fell 29.4 percent during the cited period. Petroleum products and precision equipment also declined 40.1 percent and 10.1 percent each. Passenger car exports, on the other hand, surged 125.8 percent.