Bank of Korea lowers 2023 growth outlook to 1.7%
Central bank hikes key rate to 3.25%
The Bank of Korea (BOK) slashed its 2023 growth outlook for Korea to 1.7 percent, Thursday, from its previous projection of 2.1 percent, citing anticipated slowdowns in exports and the pace of recovery in private spending.
The 2023 forecast is alarming for Asia’s fourth-largest economy as its growth potential had been estimated to be in the 2 percent range for the past few years.
The BOK kept its growth outlook for 2022 at 2.6 percent, while projecting a 2.3 percent growth for 2024.
Korea’s annual growth previously fell short of reaching the 2 percent range only during periods of four crises — minus 0.7 percent in the pandemic-stricken year of 2020, 0.8 percent in 2009 in the midst of the global financial crisis, minus 5.1 percent in 1998 during the Asian financial crisis and minus 1.6 percent in 1980 in the wake of the second global oil shock.
The central bank’s growth projection for next year is in line with estimates by the OECD at 1.8 percent and Fitch Ratings at 1.9 percent.
It is lower than the International Monetary Fund’s (IMF) forecast of 2.0 percent and Asian Development Bank’s (ADB) 2.3 percent outlook.
“Korea’s economic growth is forecast to remain below its growth potential due to sluggish growth in major economies,” the BOK said in a press release, adding that the United States, China and Japan will grow at slower paces, while the eurozone faces a possible near-term recession. “Exports of goods will continue to slow due to weakening global demand,” it added, also mentioning that overseas shipments will only rebound in the second half of 2023.
BOK Governor Rhee Chang-yong told the press, “It will be tough for our economy to grow at a fast rate and keep prices low while the entire world is struggling.”
For private consumption, the BOK said, “Recovery momentum will slow gradually due to falling real purchasing power and the rise in interest rates,” although it is expected that the effects of pent-up demand remain.
Specifically, the possibility of a steep fall in housing prices was cited as one of the major downside risks for private consumption.
Ha Joon-kyung, a Hanyang University economics professor, forecast the growth rate may fall below the 2 percent range next year as predicted by the BOK. “The perked up demand on consumption is mainly driven by the eased pandemic and such demand may diminish over time,” Ha said.
Thursday’s announcement on economic outlook was preceded by this year’s final rate-setting meeting.
The BOK’s monetary policy committee raised the policy rate by the conventional margin of a quarter-percentage point, slowing down the pace of its credit tightening to strike a balance between inflation and slowed growth.
Thursday’s hike marks the sixth consecutive rate increase since April, including two rare 50-basis-point hikes.
The benchmark seven-day repurchase agreement rate now stands at a more-than-10-year high of 3.25 percent.
“The board judges that the policy response to ensure price stability should be continued as inflation has remained high,” the BOK said.
It referred to the inflation outlook that remains above the BOK’s target goal of 2 percent although it was revised down, Thursday.
The BOK forecast 2022 consumer prices to grow at 5.1 percent, down from its previous outlook of 5.2 percent, to mark the highest level since 7.5 percent in 1998.
Inflation is anticipated to cool down to 3.6 percent next year and then 2.5 percent in 2024.
The central bank said the size of the rate hike, Thursday, was judged to be appropriate, “in overall consideration of the easing of risks in the foreign exchange sector and the contraction of short-term financial markets, while the economic slowdown is expected to be greater than forecast in August.”
It noted the U.S. dollar has weakened and long-term market interest rates have fallen, as risk aversion has partly subsided on the expectations of an adjustment to the pace of the U.S. Federal Reserve’s policy rate hikes. The minutes for the Fed’s Nov. 1-2 meeting released Wednesday showed the majority of Fed officials stating that it would soon be appropriate to reduce the size of their interest rate hikes.
Water
While Juam Dam on Wednesday saw its water level at 31 percent, Seomjin River Dam, another major water source for South Jeolla, saw the water level reach only 18 percent of its normal capacity. Worringly, the water levels are only getting lower every day.
Back in Wando on Wednesday, 15-ton dump trucks were coming out in line from a closed mine on the island of Nowha, some 30 kilometers south of Wando Harbor. Each of the rigs was filled with underground natural water taken out from the mine, where up to 5 tons of water was believed to be stored.
Each day, some 250 tons of the water was delivered to local islands. Although it wasn’t considered safe to drink by a study, there was no choice for the local residents who were desperate for water - including drinking water. Some islands saw their taps running only once a week, while seaweed farmers saw their produce, which was hung outside to dry, going rotten due to etiolation, which happens when drought causes maritime minerals like dissolved inorganic nitrogen to run lower than usual in sea water.
The Korea Meteorological Administration on Thursday expects that an expected downpour will soak the entire country next Monday and Tuesday. But average precipitation throughout December and January is expected to be either equal or less than that of the previous year — which won’t be enough to offset the damage. The authority is now keen to discover how much rain will drop at the beginning of next week.
The reason for the ongoing drought in South Jeolla, according to a KMA official, is due to the La Nina effect, a sudden change in water temperature across the Pacific Ocean which pushes warm water towards Asia while upwelling cold water towards the west coast of North America. The official said that the country under La Nina tends to get chillier than usual in December, receiving less-than-usual precipitation.