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The Korean economy will strengthen gradually in the second half to reach a growth rate of 1.4 percent in 2023, lifted by a recovery in chip exports and tourism, the International Monetary Fund (IMF) said. The country's economy is expected to grow 2.2 percent next year.
Inflation is projected to continue to moderate toward the authorities’ target, while near-term fiscal and monetary policies should stay the course and remain restrictive, limiting an increase in public debt and continuing to address inflation.
Proactive measures have helped address stress in financial markets. Continued efforts are needed to contain financial vulnerabilities related to the real estate market and high household debt.
Structural reforms are needed to raise medium-term growth and address fiscal challenges posed by an aging population.
These are some of the recommendations made by the IMF team led by Harald Finger, mission chief for the Republic of Korea, which visited Seoul from Aug. 24 to Sept 6. The team held discussions for the 2023 Article IV Consultation.
“Like many other advanced economies, Korea has faced inflation challenges and a sharp growth slowdown," said Finger. "Headline inflation has declined significantly after peaking in mid-2022, though core inflation has remained stickier. Pockets of financial sector vulnerability emerged amid the housing market downturn and rising interest rates, and financial risks have increased but appear to remain manageable."
Inflation, despite a temporary rebound in August, is projected to continue moderating and approach the 2 percent target by the end of 2024. Under the current global environment, Korea's economic outlook is subject to a high degree of uncertainty, the IMF mission chief added.
“The current, restrictive stance of monetary and fiscal policy in Korea should be maintained in the near term. The monetary policy rate should stay above neutral for the time being to address inflation, with the interest rate path remaining data-dependent. With significant fiscal expansion during the pandemic and the debt-to-GDP ratio still on an upward trajectory, fiscal policy should continue to normalize, also supporting monetary policy in containing inflation,” Finger said.
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