Korea Economic Forecast

After expanding 3.0% year on year in H1, the economy likely weakened in Q3. The external sector has been buffeted by a flagging global economy, with exports growing at the weakest rate in nearly two years in September. The sector has also been hit by reduced competitiveness arising from higher energy costs. Moreover, these elevated energy prices have dented the domestic economy by raising inflation and forcing the Central Bank to hike interest rates. Consumer confidence fell to a 22-month low in July and remained subdued in August–September. More positively, the unemployment rate reached a multi-decade low in the quarter, supporting private spending. In other news, U.S. controls on microchip exports to China were unveiled on 7 October. Several Korean firms with factories in China have been granted exemptions by the U.S., but disruptions to exports and supply chains still seem likely.

Inflation softened in September to 5.6% from August’s 5.7%. Price pressures were dampened by lower crude prices. However, they remained above the BOK’s 2.0% target. Inflation is expected to ease by the end of 2022 and then further in 2023 on slowing domestic demand. Key factors to watch include the strength of the won and the evolution of oil prices.