South Korean consumer sentiment improved as inflation eased, exports recovered and hopes arose for a pause in the Federal Reserve's rate hikes, according to a survey by the country's central bank released on Wednesday.
In December, the consumer survey index rebounded by 2.3 points to reach 99.5, marking a reversal after four consecutive months of decline. However, the index remains below 100, which means that there are still more pessimistic sentiments than optimistic ones.
The index fell below the threshold in September following global central banks' warnings of prolonged higher interest rates. This drove the bank to maintain its key interest rate at 3.5 percent for the seventh consecutive time (from April 2022 to January 2023), citing a growth slowdown and increasing household debts.
Households' economic outlook within the headline sentiment index rose for the second consecutive month to 77 in December. This coincided with the increasing momentum in exports, which serves as a foundation for economic growth.
Consumer prices, a key gauge of inflation, increased by 3.3 percent in November compared to the previous year, down from a 3.8 percent rise the month before. This was the first instance in four months where annual price growth decelerated.
Although still above three percent, the slower price growth observed in November was more significant than anticipated. The Bank of Korea (BOK) anticipates this trend to gradually ease towards its target of 2 percent by the end of the following year.
South Korea is set to release its latest inflation data on Friday. Economists polled by Bloomberg anticipate the reading to reveal unchanged consumer price growth in December at the 3.3 percent mark observed in November. These figures are crucial, as any upward shift might prompt businesses to increase prices and individuals to seek higher wages, potentially leading to continued upward pressure on future inflation.
Inflation expectations dropped by 200 basis points to 3.2 percent in December compared to last month, the lowest figure since early 2022. The decline was attributed to a downward trend in consumer prices.
South Korea's 2024 economy outlook
In 2023, South Korea faced various economic challenges from global downturns and geopolitical tensions. However, the economy has seen improvement in recent months, mainly due to the resurgence of the semiconductor industry. This positive trend is expected to continue in the coming year.
The BOK predicted a 2.1 percent growth rate for the upcoming year, surpassing this year's 1.4 percent. Meanwhile, the Organization for Economic Cooperation and Development (OECD) and the International Monetary Fund (IMF) both anticipate a higher growth rate of 2.3 percent in 2024.
The government has yet to provide its own projection for the overall economic growth and export increase next year. However, officials have anticipated a minimum 5 percent year-on-year expansion in exports.
"Next year's growth rate is projected to hover over the country's potential growth rate of 2 percent," said Jung Kyu-chul, a researcher at the state-run Korea Development Institute. "Exports of goods are likely to rise further, and service exports are also expected to increase on rising demand for tourism."
However, the potential outcomes remain uncertain, as emphasized by BOK Governor Rhee Chang-yong during a recent press conference. Inflation persists significantly above the target level, making it challenging to relax vigilance.
According to experts, high-interest rates and inflation have exacerbated conditions for corporate investment and lowered consumer confidence, leading to a wavering demand.
A Federation of Korean Industries (FKI) survey of 1,000 Koreans aged 18 or above bolstered this concern. Around 52.3 percent of the respondents plan to cut spending in the coming year compared to 2023. Among the reasons, 43.5 percent cited high consumer prices, 13 percent pointed out job loss and income decrease concerns, and 10.1 percent mentioned rising taxes and utility rates.