Korean Economic Outlook Update for 2023 - 2024

Korea's economic growth is forecast to decelerate from 2.6% in 2022 to 1.4% in 2023, but a slight recovery is expected in 2024 with a 2.3% growth rate, according to the Bank of Korea's latest economic outlook report released in May 2023. The economy is encountering rising uncertainties both domestically and internationally, causing a slowdown in economic output.

Notably, there are downside factors including sluggish exports, particularly in the IT sector, and delayed effects from China's reopening. Since China reopened its doors after an unprecedented closure of its economy, its domestic consumption has picked up, leading to a rebound in economic activity across various sectors. However, even as many industries experience a recovery, the demand for durable goods such as mobile phones and automobiles in China remains subdued. This weak demand is hampering Korea's efforts to boost exports to its neighboring country.

As overall economic growth moderates, consumer spending is weakening despite slowing inflation growth. Private consumption, which accounts for about half of the economy, is projected to increase by 2.3% in 2023 and 2.4% in 2024, representing a slowdown from 4.3% in 2022. This projection reflects weakening pent-up demand, the relatively gradual recovery of overseas travel, and the rising burden of household loan repayments. 

Equipment investment is expected to decrease by 3.2% in 2023 but is likely to regain strength in 2024. Corporate investment is expected to remain sluggish for the time being due to the delayed improvement in the global manufacturing sector and high inventory levels. From the next year, there will be an increase in investment spending driven by semiconductor companies' investments as well as major non-IT companies' expansion of investments to address environmentally friendly demand.

Construction investment will contract by 0.4% in 2023 but will rebound to a 0.2% growth in 2024. There has been a decrease in new construction starts in the midst of a slowing real estate market. Additionally, a reduction in the government’s infrastructure budget is also having a negative effect on construction investment growth. In 2024, civil engineering construction will likely increase, mainly driven by large-scale plant projects like semiconductor clusters, while the construction of residential buildings is expected to remain dull. 

A steady upward trend will continue for intellectual property investment, which is forecast to grow by 3.3% in 2023 and 3.7% in 2024. R&D investment is expected to be on the rise thanks to improving corporate revenues in the private sector and an increase in government budget for R&D in 2023. Growing demand for software applications for online platforms and services will also help boost investment activities in other intellectual property sectors.

Korea's merchandise export growth is anticipated to moderate to 0.4% in 2023 and 3.3% in 2024, with volatility in commodity prices and the war in Ukraine making global trade conditions uncertain. In particular, the trend of slowing economic growth in major economies like the U.S. and China is hurting Korea's export prospects because of its high reliance on those markets.

Korea's current account surplus is projected to decrease to USD 24 billion in 2023 and rebound to USD 45 billion in 2024. Despite weak IT exports and exports to China, the overall current account balance is anticipated to improve due to relatively favorable non-IT exports and exports to regions like Europe. This improvement is also attributed to a significant increase in dividend income from overseas subsidiaries, partly offsetting the decline in the goods and services balance.

Consumer price inflation will drop from 5.1% in 2022 to 3.5% in 2023 and then further cool down to 2.4% in 2024. Consumer prices are projected to decline due to base effects. Producer prices are also expected to gradually weaken, but the pace of decline is likely to be slower than initially estimated due to secondary effects such as stable service demand, employment trends, and cost pressures from rising expenses. Core inflation, which excludes food and energy prices, is projected to decrease to 3.3% in 2023 and 2.1% in 2024.

Due to the economic downturn, the pace of employment growth in sectors like manufacturing is expected to slow down. However, with the normalization of in-person activities, the demand for labor in the service industry will continue. The market will also see a stable increase in labor supply from women and the elderly. The number of the employed people is expected to increase by 250,000 in 2023, down from a rise of 820,000 in 2022. The unemployment rate is projected to increase to 3.0% in 2023 and 3.1% in 2024.

There is a significant possibility that our economy's growth trajectory could be constrained if China's economic growth slows down further due to factors like a sharp decline in the real estate market or inadequate stimulus measures. In the scenario of the Russia-Ukraine conflict escalating and adverse weather conditions causing a surge in oil and grain prices and pushing inflation up, countries like the U.S. might adopt tighter monetary policies. This could result in financial market instability and potentially weaken global economic growth, creating headwinds for the Korean economy.