Shoppers buy food for the Lunar New Year holiday at a traditional market in Gwangju, Tuesday. Yonhap

Housing market slump, consumer debt to weigh on economy

By Yi Whan-woo

The Korean economy is forecast to shrink 0.6 percent this year, as a downturn in home prices and the deleveraging of household debt are feared to further weaken private spending, a senior economist at Nomura said Wednesday.

The growth outlook for Korea by Robert Subbaraman, Nomura's chief Asia economist and head of global market research, is even gloomier than consensus estimates within and outside of Korea forecasting a rare 1 percent range growth.

Robert Subbaraman, chief Asia economist and head of global market research at Nomura Courtesy of Nomura

In order to forestall a recession, Subbaraman forecast that the Korean central bank will keep its key interest rate unchanged and cut it beginning in May to bring the rate down to 2 percent by the end of this year. The base rate currently stands at 3.5 percent.

"Nomura has a more cautious outlook on Korea's economy this year than the consensus of economists … We're expecting a mild recession," Subbaraman said during a webinar hosted by the Institute for Global Economics, a Seoul-based economic think tank.

The webinar focused on the theme of global economic prospects and challenges for Korea this year.

Subbaraman's prediction is lower than the Ministry of Economy and Finance's GDP growth estimate for Korea at 1.6 percent and the Bank of Korea's (BOK) at 1.7 percent. The OECD estimates Korea's economy to expand 1.8 percent, while S&P, JP Morgan, Goldman Sachs and Credit Suisse all forecast 1.4 percent growth.

The country's economy previously contracted 1 percent in 2020, during the height of the COVID-19 pandemic. It was the worst growth since 1998 when Korea's GDP contracted 5.1 percent in the midst of the Asian financial crisis.

The Nomura economist viewed exports will continue to slow down after declining for three consecutive months in December and added to a record trade deficit of $47.2 billion in all of 2022.

"But in addition to that, when we look at shipments relative to inventories, partly because exports have turned down, consumption is looking like it's starting to weaken," he said.

He went onto say that weakened private spending, the two main drivers of growth along with exports, is "not good for the economy in the coming months," considering Korea has seen a significant increase in home prices and surging demand for loans in recent years.

"If those two things start to unravel at the same time with house prices going down and households deleveraging, there's a greater risk of what we would call a balance sheet recession," he added, noting that such an event could "cause more financial stress or keep the financial stress for a bit longer" to contribute to a slowdown of the economy.

Subbaraman forecast the key interest rate will remain unchanged until May before being slashed by a combined 1.5 percentage points by the end of the year.

The size of such a rate decrease will be half the size of the rate increase _ a combined 3 percentage points _ carried out by the Bank of Korea (BOK) since August 2021.

For the global economy, Subbaraman forecast the U.S. and European Union will undergo a mild recession while China will recover after years of COVID-19 lockdowns.

The Federal Reserve is anticipated to slow the pace of credit tightening as U.S. inflation is cooling down, according to the Nomura economist.

Accordingly, the U.S. policy rate is expected to peak at 5 percent in March, up from the current range of 4.25 percent to 4.5 percent, and will be lowered to 4.25 percent by the end of this year.

Subbaraman viewed pent-up demand in China will not be as great as in other countries because its government did not provide much cash handouts. Also, China's state-run welfare system is weak, while declining home prices are eroding household wealth.