The Korea Development Institute (KDI), a government-backed research institution, has forecast South Korea’s economic growth at 2.2% this year, a further downgrade from 2.5% in August, which had already been reduced from 2.6%. This forecast is lower than the government’s target of 2.6% and the averages of the Bank of Korea, OECD, and global investment banks. While exports have recovered, construction investment has been weaker than expected, and domestic demand remains stagnant. According to Statistics Korea, construction investment has been negative year-on-year for five consecutive months from May to September. Household debt has also dampened domestic consumption, with third-quarter growth at just 0.1% from the previous quarter.
KDI has also lowered its growth forecast for next year from 2.1% to 2%. Even with some improvement in domestic demand, export growth is expected to fall to 2.1%, one-third of this year’s 7%, due to U.S. President-elect Trump’s administration. The international environment for South Korea’s economy is increasingly uncertain. The U.S.-China power struggle has turned South Korea’s trade surplus with China into a deficit. Exports to the U.S. have now surpassed those to China for the first time in 21 years. However, if U.S. exports face tariff barriers, economic growth will face challenges.
Even as KDI paints a grim economic outlook, just a day earlier, the Ministry of Economy and Finance proudly claimed it had minimized the shock of the global crisis through price stability, job growth, and export activation. Even if the government is highlighting positive outcomes to promote its achievements at the president’s midterm, its self-assessment claiming success in managing household and national debt while boosting growth through private-sector-driven efforts raises doubts about their judgment of the actual economic situation.
The fundamental solution for the economy is to lift regulations and revitalize innovation, but this is impossible due to opposition from the Democratic Party. Immediate measures to boost growth next year must be found. While KDI calls for a cut in the BOK’s key interest rate, the central bank hesitates to act, citing concerns over household debt and exchange rates. The government, the BOK, and KDI must align and honestly assess the economic reality to devise solutions.
