The Korean economy has recovered strongly from the pandemic, led by robust export growth and a strong rebound in private consumption. However, inflation remains elevated and the economic outlook in the near term has deteriorated amid tighter financial conditions and weakening external demand. As risks to the economic outlook remain significant, the authorities need to be ready to recalibrate the monetary and fiscal policies flexibly and prudently to contain inflation and support the economy.

Real GDP grew strongly by 2.6 percent in 2022, driving the output gap into positive territory for the first time since 2020. However, the economic recovery from the pandemic remains uneven across sectors. While manufacturing activities rebounded quickly, services recovered only gradually.

The economic outlook in the near term has deteriorated. Private consumption and exports are expected to decelerate, and facility investments to remain weak amid tighter financial conditions and weakening external demand. The economy is forecast to moderate to 1.7 percent in 2023.

With energy and food prices likely to continue falling, headline inflation should gradually decline to an average of 3.3 percent in 2023 from 5.1 percent in 2022. Short-term inflation expectations have risen, while long-term expectations, based on market pricing, remain well-anchored.