Also available in Korean (provided by the Ministry of Economy and Finance of Korea)

SINGAPORE, February 17, 2020 – The Korean economy slowed down in 2019 amid headwinds from global trade tensions and a synchronized global economic slowdown, according to the 2019 Annual Consultation Report on Korea published by the ASEAN+3 Macroeconomic Research Office (AMRO) today. The report was prepared based on AMRO’s Annual Consultation Visit to the country in September 2019 and data availability as of November 20, 2019.

Korea’s growth in 2019 moderated to 2.0 percent[1], underpinned by expanded fiscal spending and private consumption while exports is expected to contract. Construction investment remains moderate, while facilities investment is likely to bottom out early next year. In 2020, growth is expected to pick up to 2.4 percent[2], supported by a rebound of global demand for memory chips led by the 5G installation in many countries. Headline inflation is expected to settle at 0.4 percent in 2019 and rise to 0.9 percent in 2020, remaining below the 2-percent inflation target set by the Bank of Korea.

External position is strong on the back of persistent current account surpluses and ample international reserves. Despite a contraction in exports, the current account has remained in surplus. The bulk of the surplus continues to be invested overseas by domestic residents in search of higher returns and portfolio diversification towards long-term assets. Meanwhile, Korea’s bond market remains attractive to foreign investors, reflecting the country’s strong external and fiscal position. The equity flows have been volatile since the beginning of 2019 due to heightened concerns over the gloomy global economic outlook, and the impact of the U.S.-China trade tensions on the Korean economy.

In the near term, downside risks to Korea’s highly open economy stem from weaker-than-expected growth in China and advanced economies and an escalation of the U.S.-China trade tensions. While Japan’s stricter export controls have had limited impact on Korea’s information and communications technology (ICT) industry so far, they have heightened business uncertainty and concern over the country’s reliance on a single country for key technological products. Over the longer term, Korea continues to face structural challenges stemming from an aging population and the wide disparity between large conglomerates and small-and-medium enterprises (SMEs).

In the financial system, risks and vulnerabilities stemming from a high level of household debt and a surge in housing prices are contained. However, indebtedness among low-income households and housing price speculations in prime areas continue to warrant vigilance amid easy financial conditions and an economic slowdown. Meanwhile, heightened geopolitical risks and lingering trade friction could also increase volatility in Korea’s financial markets.

Amid intensified external risks, the macrofinancial policy mix should be calibrated to support the economy against a cyclical slowdown while maintaining financial stability. Given ample fiscal space, the fiscal stance should remain expansionary in the near term with more spending allocated toward restructuring the economy. At the same time, monetary policy should be accommodative in view of moderating economic growth and muted inflationary pressure. Overall macroprudential policy mix should remain tight to guard against the buildup of financial imbalances, although certain measures could be refined to be more targeted to allow more credit expansion in supporting the economy.

To address structural challenges, the government’s continuing efforts and strong commitment to further achieve inclusive growth and promote innovation are welcome. Besides the amendment of laws and regulations related to fair trade, the government should provide more support to SMEs in terms of research and development and training in view of their low levels of technological adoption and innovation compared to large corporates.

[1] GDP growth in 2019 was based on the advance estimation of GDP, published by the Bank of Korea on January 22, 2020.

[2] AMRO’s projection of growth for 2020 was revised up to 2.4 percent in January 2020 from the previous 2.2 percent done during the 2019 Annual Consultation Visit to Korea. The projection does not include impacts of the novel-Coronavirus (COVID-19).

About AMRO and AMRO Annual Consultation Report:

The ASEAN+3 Macroeconomic Research Office (AMRO) was established to contribute to securing the economic and financial stability of the ASEAN+3 region, which include 10 members of the Association of Southeast Asian Nations (ASEAN) and China; Hong Kong, China; Japan; and Korea. As an international organization, AMRO fulfils its mandate by conducting macroeconomic surveillance, supporting the implementation of the regional financial arrangements, the Chiang Mai Initiative Multilateralisation (CMIM), and providing technical assistance to the members.

The Annual Consultation Report was prepared in accordance with AMRO’s macroeconomic surveillance function. AMRO is committed to monitoring, analyzing and reporting to its members on their macroeconomic status and financial soundness. It also helps identify relevant risks and vulnerabilities, and assists members, if requested, in the timely formulation of policy recommendations to mitigate such risks.