Korea's economy to slowly, but surely, recover in 2024

Economy

Published: 01 Jan. 2024, 07:00

Korea's economy to slowly, but surely, recover in 2024

The sun silhouettes a dragon sculpture placed at Gwangalli Beach in Busan to mark the Year of the Dragon. [YONHAP]

A year ago, Korea was staring down a set of seemingly insurmountable economic challenges; breakneck inflation of 5 percent, high interest rates and record high trade deficits.

But the economy is now witnessing milder inflation in the 3 percent range, a possible pause to rate hikes — or even a return to rate cuts — and the recovery of its exports.

The easing of headwinds has put the country on a path toward slow-yet-steady economic growth in 2024, although geopolitical uncertainties and weak consumer demand drag on.

The Organization for Economic Cooperation and Development (OECD) bumped up its projection of 2024’s economic growth by 0.2 percentage points to 2.3 percent while maintaining last year’s at 1.4 percent.

“Inflation growth will slow and interest rates will fall in 2024, though the speed of the fall may not be as rapid as the market anticipates depending on the movement of the Federal Reserve’s target interest rates,” said Lee Yoon-soo, a professor at Sogang University’s School of Economics.

“Risks associated with currency exchange rate are expected to ease from the reduced chance of rate differential growth between the Federal Reserve and Bank of Korea [BOK],” Lee added.

Analysts have an optimistic outlook for the Kospi along with the projected ease of monetary tightening in key countries and its impacts on Korea.

The country's benchmark Kospi is projected to break the 3,000-point threshold in the second quarter, according to Daishin Securities, if the U.S. Federal Reserve starts slashing interest rates in March.

Financial markets have increasingly priced in a rate cut as early as March following December's Federal Open Market Committee (FOMC) meeting. The dot plot, which estimates what the federal funds rate should be, depicts reductions from the current targeted range of 5.25 to 5.5 percent.

“The outcome of the FOMC meeting in March 2024 will determine the annual level and flow of the Kospi,” said Lee Kyoung-min, a strategist at Daishin Securities, in a December report.

Daishin's projection was higher than those of other brokerage firms. The lowest band of the expected range for Kospi was 1,900 points — an outlook by Kyobo Securities, which also projects that rates will remain high in 2024. High rates make money more expensive for both companies and individuals to borrow, stressing both corporate and personal balance sheets.

Analysts project that chips will lead Korea's growth next year, as their export is on a recovery path supported by production cuts and an AI-driven demand. The OECD expects Korea's overall exports to grow 4 percent in 2024 while the International Monetary Fund forecasts a 3.5 percent increase.

“Korea's chip exports are expected to grow in the first half of 2024 due to the production cuts from early 2023,” said Kim Yang-paeng, senior research specialist at Korea Institute for Industrial Economics & Trade.

“The effects are expected to strengthen in the second half as demand for PCs, smartphones and data centers in the United States start to pick up on a projected economic recovery.”

Samsung Electronics slashed its chip production in early 2023, following actions that peers like SK hynix and Micron Technology took in late 2022. The effects of production cuts usually start to be realized six months later when inventories start to run out, Kim added.

Korea's chip exports grew for the first time in 16 months in November, according to data from the Ministry of Trade, Industry and Energy. The exports jumped 12.9 percent on year to $9.52 billion.

“The projected 2.1 percent growth next year assumes that IT exports recover significantly,” BOK Gov. Rhee Chang-yong told reporters on Dec. 20. “Excluding the IT sector, the economy will grow 1.7 percent.”

But pessimists say unresolved uncertainties will continue to take a toll on Korea’s economy.

Potential confounds include project financing defaults, a slow recovery in China and the elections taking place in Korea and the United States in April and November, respectively, which could majorly alter economic policies, according to PwC's December economic outlook.

The total balance of outstanding project financing loans reached 134.3 trillion won as of the third quarter. That number was just 112.9 trillion won at the end of 2020.

Considering that it took five years to normalize real estate project financing after the 2008 financial crisis, the government is expected to manage the loans in a way that minimizes their impact on the market instead of quickly disposing of them, the report read.

“Default in project financing could lead to the bankruptcy of construction firms, which are linked with a myriad of industries and subcontractors,” said Lee Jeong-hwan, an associate professor at Hanyang University's College of Economics and Finance. “Their bankruptcy will accordingly endanger the soundness of financial institutions, potentially triggering bank runs.”

Taeyoung Engineering & Construction, the 16th largest builder in Korea, applied for debt restructuring on Dec. 28 due to a liquidity crunch related to real estate project financing loans.

Delinquency rates for real estate project financing loans have been on the rise amid a weak property market, raising concerns about the financial soundness of institutions with exposure to the loans.

“Recession or economic slowdown is certain in 2024, as the impacts of monetary tightening usually start to be realized a year later,” said Seok Byoung-hoon, an economics professor at Ewha Womans University.

The BOK cut the outlook for Korea's 2024 growth to 2.1 percent in November from its August projection of 2.2 percent. The bank cited weak momentum in domestic spending and construction facility investment, a major economic driver.

The Korean central bank cut inflation projection to 2.6 percent from 2.4 percent over the same period.

“Stabilizing inflation will be most important in the first half, while preventing recession through monetary policy will be a priority in the second half,” Seok added.

BY JIN MIN-JI, PARK EUN-JEE [jin.minji@joongang.co.kr]