SEOUL, October 23 (Yonhap) – The Bank of Korea (BOK) has announced that South Korea’s economy is poised for a mild recovery, but it faces a challenging road ahead due to various factors, including geopolitical tensions and fluctuating interest rates in major economies. In a recent report submitted for parliamentary inspection, the central bank outlined its assessment of the economic landscape.
Despite a slowdown in inflation, the BOK anticipates a gradual recovery in the South Korean economy in the coming year. This recovery will be driven by the easing of a previous slump in exports, even though private spending remains relatively weak. It’s worth noting that earlier this year, the bank had lowered its growth projection for Asia’s fourth-largest economy from 1.6 percent to 1.4 percent.
Surprisingly, South Korea’s economy demonstrated a slight acceleration, growing by 0.6 percent in the second quarter of this year, despite a slump in exports. This improvement follows a 0.3 percent contraction in the first quarter.
The Bank of Korea noted, “Thanks to the recovery in the IT sector, the country’s current account has been in the black since May and will continue to be in surplus.” Specifically, the chipmaking sector, a key pillar of South Korea’s economy, is displaying signs of recovery. The report mentioned that adjustments in the sector’s inventory levels are expected to conclude in the first half of the next year as demand and supply conditions improve.
However, while the central bank’s growth outlook for this year is likely to remain stable, next year’s growth estimate requires a more cautious review. BOK Governor Rhee Chang-yong stated, “We forecast a 2.2 percent expansion next year, but it is hard to predict, given the Chinese economic situation and developments in the Middle East.”
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On the inflation front, the BOK anticipates a slowdown in inflation due to weak demand-side pressure and the stabilization of farm goods prices. Still, it cautions that the ongoing conflict between Israel and Hamas may hinder the pace of this slowdown. Recent data has shown that inflation is moderating, although it saw a slight increase last month due to higher oil prices.
Consumer prices rose by 3.7 percent last month compared to a year earlier, the fastest increase in five months, driven by higher oil costs and rising prices of some farm goods. The BOK had originally expected inflation to hover around 3 percent before the Israel-Hamas conflict, but now there is a higher likelihood of accelerated inflation in the future.
For the full year, the central bank expects inflation to reach 3.5 percent, a significant deviation from its target rate of 2 percent. This divergence reflects the uncertainty in the economic landscape.
The BOK emphasized that South Korea’s economy still faces increased uncertainties, including the trajectory of China’s economy, the unfolding events in the Middle East, and the volatility in the global financial market.
Regarding the issue of growing household debt, Governor Rhee emphasized the need for serious consideration, saying that a rate hike might be necessary if this issue is not addressed promptly. Household loans extended by banks in South Korea have increased for six consecutive months, primarily driven by rising home-backed loans. The central bank believes that microeconomic measures should be prioritized to control soaring debt, and interest rate adjustments can be considered later.
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