Economic Forecast for 2021 and the Medium-Term
Published on 29 September 2020
Published by Macro-Economic Analysis Division of the Economic Analysis Bureau
In 2021, The Korean economy is expected to gradually recover from the COVID-19 shock and grow by 2.3%. Private consumption is expected to experience a sudden drop in 2020 due to the COVID-19 shock but stage a rebound in 2021 with increased consumption and improved consumer confidence. Sluggish construction investment will recover slightly with improved leading indicators and an expanded government SOC budget, but there will be a small decrease in annual figures as private housing construction remains weak. Plant and equipment investments are expected to grow mainly in the IT sector such as semi-conductors, but investments will exhibit a limited increase in non-IT sectors due to weak economic activity in most areas and uncertainties in economic conditions. As private R&D investments continue to grow, intellectual property product investments are expected to exhibit strong growth led by online service-related software development, with increased demand due to COVID-19. Total exports (in terms of volume) will stage a rebound boosted by the increased global trade volume incurred by the resumption of economic activity in major economies, while total imports (in terms of volume) are expected to increase mainly in terms of the import of goods, according to the domestic economic recovery trend.
The real GDP growth rate in the medium-term (2020-2024) is expected to decline from an average of 2.8% per year over the past five years (2015-2019) to an average of 1.6% per year, exhibiting an annual growth rate of 2.5% on average when excluding the year 2020. The growth trend in real GDP over the next five years is expected to begin with a slump due to the spread of COVID-19, incurring reverse growth in 2020, but afterwards enter a recovery trajectory in 2021, reach a peak of 2.8% growth in 2022, followed by gradually subdued growth momentum.
Korea’s potential growth rate between 2020 and 2024 is estimated to reach an annual 2.0% on average, as the contribution of total factor productivity and capital substantially decline, due to lower efficiency in the overall economy and weakening investments caused by shocks from COVID-19. The rate of capital’s contribution to potential growth (1.1%p) is expected to fall by 0.4%p compared to that of the previous five years (1.5%p) as the total fixed investment increase rate drops significantly, particularly in terms of construction investment, playing a major factor in the declining potential growth rate. The contribution of capital to growth is estimated to decrease by a particularly wide margin. Therefore, this implies that increased investment is of the utmost importance in order for the Korean economy to secure its growth potential.