SEOUL, Nov. 11 (Yonhap) — The South Korean economy is likely to grow at a slower-than-expected pace next year as domestic demand remains weak amid the fallout of the new coronavirus outbreak, a state-run think tank said Wednesday.

The Korea Development Institute (KDI) revised down the 2021 growth outlook for Asia’s fourth-largest economy to 3.1 percent from its September estimate of 3.5 percent. It kept steady its 2020 outlook at a contraction of 1.1 percent.

A cut in KDI’s growth forecast is mainly blamed on lingering impacts of the COVID-19 pandemic on consumer spending as slumps in the service sector will go on amid a non-contact trend.

“In 2021, despite improvements in exports, the South Korean economy is likely to grow 3.1 percent as domestic demand will undergo limited recovery,” KDI said in a statement.

Given the country’s yearly average economic growth rate in 2020-2021 will remain around 1 percent, the economy is expected to stay below the normal growth path next year, it added.

“The recovery of the South Korean economy is expected to proceed slowly in a limited manner,” KDI noted.

KDI’s projection is higher than the Bank of Korea (BOK)’s growth outlook. The BOK forecast the Korean economy to retreat 1.3 percent this year and grow 2.8 percent next year, citing pandemic-caused uncertainties.

The South Korean economy grew 1.9 percent on-quarter in the third quarter, marking the first quarterly growth after two quarters of contraction, as exports rebounded amid eased global lockdowns.

KDI said private spending is expected to remain weak next year amid the impact of the pandemic, while outbound shipments of chips and autos, key export items, will likely recover.

Private spending is forecast to contract 4.3 percent this year and only grow 2.4 percent next year despite the base effect, according to the KDI.

Exports, which account for about 50 percent of the Korean economy, are expected to grow 3.1 percent in 2021, after retreating 4.2 percent this year.

The think tank said the country’s consumer inflation is forecast to remain subdued throughout next year, affected by low inflation expectations and weak demand-side pressure.

Consumer prices are expected to grow 0.7 percent next year after rising 0.5 percent this year, lower than the 2 percent inflation target by the BOK over the medium term.

The think tank said the main downside risks to the Korean economy will be the possibility that the COVID-19 pandemic will protract and a potential flare-up in trade tensions between the United States and China.

KDI said the government needs to maintain its expansionary macroeconomic policy for the time being as the pandemic-economic slumps could continue.

The government drew up four rounds of extra budgets this year to cushion the impact of the pandemic on the economy. It proposed a record 555.8 trillion-won (US$498.5 billion) budget for next year to spur economic recovery and create jobs.

KDI raised the need to remain vigilant against fast growth in state debt on concerns about financial health and its negative impact on the country’s sovereign rating.

“Over the mid and long term, (the government) should make an effort to control growth in state debt and maintain fiscal soundness in consideration of the aging population and a fall in potential economic growth,” KDI noted.

The country’s debt is likely to reach a record 846.9 trillion won this year as the government sold deficit-covering bonds to finance four supplementary budgets, according to the finance ministry.

The nation’s debt-to-GDP ratio will reach an all-time high of 43.9 percent this year, up 6.2 percentage points from the end of last year.