Korea Economic Forecast

GDP grew at the fastest rate in over a year in Q2 quarter on quarter. However, the reading was largely due to a plunge in imports. Private spending weakened, pointing to the effect of high interest rates on Korean households, whose average debt burden is among the highest in the world. Moreover, exports declined, largely owing to weak growth among Korea’s main trading partners. Turning to Q3, quarter-on-quarter GDP growth is projected to slow. Private spending and exports are likely to remain weak in the face of still-high interest rates and an anemic recovery in China. Retail sales fell in July, and merchandise exports slumped the most since May 2020 in July and continued to decline sharply in August. In other news, the government said its proposed budget for 2024 would be 2.8% bigger than in 2023—the smallest rise since 2006, when budgetary statistics were last remodeled.

Inflation rose more than had been expected by the market in August, to 3.4% from 2.3% in July. Inflation is expected to decline on average through December from current levels, before averaging close to the Central Bank’s 2.0% target in 2024. However, rising oil prices and sticky core inflation pose upside risks.