KDI Also Lowers Growth Forecast - Export, Domestic Demand, Employment Face 'Triple Whammy' < Video < Article

※This content was broadcast on the 'Economy ON' program of Yonhap News TV on February 12 (Wednesday) at 4 PM. (Featuring: Wook Choi, Yonhap Infomax reporter, Hosted by: Min Jae Lee)

[Anchor Min Jae Lee]

As South Korea's economy is expected to grow only in the 1% range this year, the state-run Korea Development Institute (KDI) has also significantly lowered its growth forecast. The outlook is particularly gloomy as major economic sectors including exports, domestic demand, and employment are all expected to perform poorly. Let's find out more details about how KDI views our economic situation this year with economic reporter Wook Choi.

[Reporter Wook Choi]

The Korea Development Institute, KDI, is Korea's leading economic think tank. Generally, when listing economic forecasting institutions in Korea, the Ministry of Economy and Finance, the Bank of Korea, and KDI are often mentioned.

Earlier, when the Ministry of Economy and Finance announced its economic policy direction for this year, it lowered Korea's growth forecast to 1.8%, so there was interest in how much KDI would lower its forecast.

In its revised economic outlook released yesterday, KDI presented a growth forecast of 1.6%, lower than that of the Ministry of Economy and Finance. This is also 0.4 percentage points lower than the previous forecast announced in November last year.

Lowering the growth forecast by 0.4 percentage points in just three months is quite unusual. This is interpreted to mean that KDI has a gloomy outlook on the Korean economy this year.

[Anchor]

It seems that there were many concerns about low growth even when the Ministry of Economy and Finance forecasted 1.8% growth, but now that the forecast has been lowered even further, it doesn't seem ordinary. Can you explain how low 1.6% is?

[Reporter]

As I mentioned earlier, the government forecast announced by the Ministry of Economy and Finance is 1.8%, higher than KDI's. The Bank of Korea's forecast is 1.6-1.7%, similar to KDI's level. The average forecast of foreign investment banks compiled by the Korea Center for International Finance is also around 1.6%.

International organizations are presenting relatively higher figures, perhaps because they haven't fully reflected domestic political risks in their economic forecasts yet. The IMF forecasts this year's growth rate at 2.0%, and the OECD expects the Korean economy to grow by 2.1%.

Overall, among major institutions, KDI's forecast can be seen as on the lower side. Some foreign institutions are already forecasting that Korea's growth rate this year could be in the low 1% range, so it's difficult to rule out the possibility that the actual growth rate could be lower than 1.6%.

[Anchor]

1.6% already seems quite low, but it could be adjusted even lower.

[Reporter]

Yes. KDI added two conditions when announcing this revised forecast. Among the risks currently facing our economy, the biggest risk factors can be said to be the trade policies of the Trump administration in the U.S. and domestic political instability.

KDI's official opinion is that if trade conflicts intensify further due to U.S. government policies or if domestic political instability lasts longer than expected, this year's growth rate could be even lower than 1.6%.

In particular, KDI is paying attention to the fact that the pace of tariff increases by the Trump administration is faster than expected. Changes in U.S. trade policies, such as imposing tariffs on steel, can directly impact our exports.

Also, as tariffs increase, if the economic situations of other countries, including China, worsen, it could be an additional downside factor for our exports.

[Anchor]

So far, we've looked at KDI's overall economic outlook focusing on the growth rate. Looking at it by sector, which areas are showing more warning signs?

[Reporter]

For reference, Korea's economic growth rate last year was 2.0%. This is about the level of Korea's potential growth rate, so it's hard to say it was very bad.

Looking at it by sector, exports increased by 8.2%, showing a good performance. Employment also increased by 159,000 jobs on an annual basis, so it can be evaluated that it wasn't the worst situation. Domestic demand sectors such as consumption and construction investment showed weak trends.

The problem is that while the domestic demand slump is showing signs of prolongation, exports and employment are also at risk of declining.

In diagnosing the current economic situation, KDI assessed that both domestic demand and exports are showing low growth rates. Regarding employment, it also predicted that the growth rate would slow down as economic growth weakens.

[Anchor]

Listening to your explanation, the phrase "total crisis" comes to mind. But I heard that consumer prices are not expected to rise much.

[Reporter]

Yes, that's right. As economic growth is contracting, there aren't many factors to stimulate prices. With low demand pressure continuing, consumer price inflation this year is expected to be 1.6%, lower than last year's 2.3%.

I should explain a bit more about what low demand pressure means. When consumption picks up, personal service prices rise. Typically, dining-out prices fall into this category.

However, as consumption is expected to remain weak this year, personal service prices like dining-out prices are not expected to rise significantly.

[Anchor]

Aren't factors like international oil prices and exchange rates also important variables for consumer prices?

[Reporter]

Yes. International oil prices have a significant impact on Korea's consumer prices. KDI estimated this year's crude oil import price at $75 per barrel. In 2023 and last year, it was $81 and $80 respectively, so it seems they expect oil prices to stabilize somewhat this year.

The dollar-won exchange rate is currently at a high level in the mid-1,400 won range. However, KDI forecasted that the won's value would not fluctuate much from recent levels.

To summarize, they predicted that oil prices and exchange rates would not be major variables for consumer prices this year.

[Anchor]

Now that we've heard the diagnosis of the economy, I'm curious about the prescription. What policies did KDI advise are necessary to overcome low growth?

[Reporter]

Since monetary policy and fiscal policy are the biggest pillars of economic policy, I should explain in these two categories.

First, regarding monetary policy, KDI emphasized that the base rate still needs to be further lowered while assessing that the stance is still tight. They also diagnosed that Korea's potential growth rate has already entered the 1% range.

Specifically, they advised that considering the neutral interest rate to be roughly in the mid-2% range and the poor economic conditions, it's necessary to lower the interest rate at least two or three times.

The current base rate is 3.0%, and KDI's view is that the Bank of Korea should lower the rate two or three more times from here.

[Anchor]

These days, supplementary budget is an important issue in political circles. Was there any mention of this?

[Reporter]

Currently, not only political circles but also many economic experts are recognizing the need for economic reinforcement through a supplementary budget. However, KDI expressed a cautious stance regarding the supplementary budget.

The National Finance Act stipulates that a supplementary budget can be formulated when an economic recession or mass unemployment occurs.

Jung-cheol Jung, Director of KDI's Economic Outlook Office, said it's difficult to clearly state that the conditions for a supplementary budget have been met even if the growth rate is in the mid to late 1% range. He also expressed the view that it's difficult to see the current fiscal policy as tight because the fiscal deficit has expanded significantly during the COVID-19 pandemic.

[Anchor]

I heard that among foreign institutions, the IMF and Fitch made important announcements related to the Korean economy. Could you introduce those contents as well?

[Reporter]

Yes. On the 6th, the international credit rating agency Fitch announced that it would maintain Korea's national credit rating at 'AA-'. They also stated that they would maintain the credit rating outlook as 'stable'.

There were significant concerns that the national credit rating could be downgraded due to the recent political instability. With Fitch, one of the world's three major credit rating agencies, deciding to maintain the rating, it can be seen that we've passed one hurdle for now.

However, there are also assessments that it's too early to be relieved. Fitch also warned that if the political deadlock continues for a long period, policy-making efficiency, economic performance, and fiscal soundness could deteriorate.

[Anchor]

What was included in the IMF report?

[Reporter]

The IMF released its '2024 Korea Annual Consultation Report' on the 7th. This report was based on the annual consultation held last November between the IMF Korea mission team and major government departments and related agencies such as the Ministry of Economy and Finance and the Bank of Korea.

As mentioned earlier, while the IMF presented a relatively high growth rate of 2.0% for Korea this year, they clearly stated that downside risks are dominant.

Another noteworthy point is that they mentioned that if growth slows down due to the realization of downside risks and inflation falls below the target level, more accommodative monetary policy and additional fiscal support for vulnerable groups could be considered. This is interpreted as a recommendation that a supplementary budget should be used to respond if the economy further slows down.

(Yonhap Infomax Economic Department Reporter Wook Choi)

※This content is from the video news covered in the Yonhap News TV Investigation File corner.

wchoi@yna.co.kr

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Wook Choi wchoi@yna.co.kr