KDI lowers Korea 2022 growth forecast to 2.8% from 3%

A consumer shops for grocery at a store in Seoul on Tuesday. KDI raisd its inflation outlook from 1.7 percent to 4.2 percent. [YONHAP]

The Korea Development Institute (KDI) has lowered its economic growth outlook for 2022 from 3.0 percent to 2.8 percent.

The key drag is the slowing of export growth rather than slowing private consumption.

It raised its outlook for inflation to 4.2 percent from 1.7 percent.

State-run KDI also reported Wednesday that in the first half of this year the economy is likely to grow 2.9 percent. But in the second half, growth will slow to 2.7 percent.

The KDI projection is lower than the government's 3.1 percent and the Bank of Korea's 3 percent projections, but it is higher than the IMF forecast of 2.5 percent.

The Korean think tank cited slowing growth in exports.

Exports are expected to grow 5.1 percent in 2022 from 9.9 percent last year.
In the first half, exports are expected to grow 7.5 percent, but second-half growth is forecast at 2.9 percent.

One of the key headwinds is the U.S. Federal Reserve's rapid increase in rates, which may limit the recovery of emerging markets. This in turn would affect Korea's economic recovery.

Supply chain woes, unstable commodity supplies and the rapidly cooling of the Chinese economy are also considered to be key factors negatively affecting Korea's export.

The KDI projects consumer spending to increase 2.8 percent this year.

The think tank noted that despite inflation, consumer spending will increase as a result of government support and the easing of social distancing regulations.

Facility investment on the other hand is expected to decline 4.0 percent as companies, especially those making semiconductors, will slow investment after heavy outlays during the pandemic.

The inflation forecast has been adjusted downward from the previous projection.

This is largely due to major global events and trends since the beginning of the year, including the war in Ukraine and the lockdown implemented in China.

The last outlook by the KDI was made in November when it projected Dubai crude, which is the biggest oil import for Korea, to be trading around $50 per barrel.

Dubai crude is trading at about $108 per barrel.

The institute projects inflation to start easing, to 2.2 percent next year, and it anticipates the unemployment rate dropping to 3.1 percent from 3.7 percent in 2021.

In 2023, the unemployment rate will settle at 3.3 percent, according to the KDI's forecasts.

The KDI urged the government to focus on narrowing the fiscal deficit and containing national debt growth.

The think tank supports the Yoon Suk-yeol government's supplementary budget, which compensates small business for losses suffered during the pandemic. KDI noted that spending should be focused on areas where the money is most needed.

The Yoon government has submitted a record 59.4 trillion won ($47 billion) supplementary budget. When netting out subsidies to local governments and transfers for local education, the extra spending totals 36.4 trillion won.

Eight extra budgets have been passed since the pandemic started.

Monetary policy needs to be tightened and target inflation, the KDI said.

Bank of Korea Gov. Rhee Chang-yong on Monday raised the possibility of raising the interest rate 0.5 percentage points.

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