Weak consumer spending knocks KDI forecast down to 2.2 percent

Containers are stacked up at a pier at a port in Incheon on Wednesday. [NEWS1]

The Korea Development Institute (KDI) revised down the country’s growth forecast for this year and the next on Thursday, citing weak consumer spending amid high interest rates and geopolitical tensions that may slow recovery.

The KDI adjusted this year's growth forecast down to 1.4 percent from its August projection of 1.5 percent. The revised forecast is in line with that of the government, the Bank of Korea and the International Monetary Fund.

The institute also cut next year’s growth projection by 0.1 percentage points to 2.2 percent.

“The trend of high interest rates has prolonged, and the market rate has also surged compared to our expectations in August,” said Jung Kyu-chul, senior fellow at the KDI during a briefing at the Sejong government complex.

The high rates have slowed consumer spending and investment, he added.

The institute revised the consumer price forecast for 2023 and 2024 up by 0.1 percentage points — to 3.6 percent and 2.6 percent, respectively — amid volatility in global oil prices due to geopolitical tensions in the Middle East.

“Domestic consumption is expected to weaken, but economic slowdown will ease from export recovery,” the KDI said in a statement. “Global economic growth will remain low due to the extended period of high interest rates in key countries, but Korea’s exports are projected to pick up on an improving global semiconductor industry.”

Chip exports were down 14.6 percent on year in September, narrowing from their 21.2 percent fall in the previous month.

The KDI noted the need to keep restrictive monetary policies for an extended period to tame inflation. Core inflation currently remains above 3 percent. Excluding volatile food and energy prices, it reached 3.2 percent in October. Consumer prices reached 3.8 percent during the same period.

The institute raised concerns about the government’s budget deficit amid a steep fall in government revenue compared to its expenditures.

Real estate transactions have fallen, impacted by high interest rates. Property prices also declined this year following their massive rally after 2020's Covid-19 outbreak.

Korea’s fiscal balance, which excludes its social security balance, reported a 70.6 trillion won ($53.8 billion) deficit through September this year, up from 66 trillion won from the previous month.

The government saw a 39.1 trillion won in fiscal revenue through September 2022.

Total government expenditure this year contracted by 68.5 trillion won on year due to cuts in Covid-19 support measures including financial support for self-employed individuals. Revenue also declined due to a fall in taxes, including those levied on income and corporations, due to weak real estate and tumbling stocks.

BY JIN MIN-JI [jin.minji@joongang.co.kr]