Korea: Growth to Moderate amid External Headwinds and Domestic Structural Challenges

2018-12-20T18:27:22+00:00December 21, 2018|Press Release|

Korea: Growth to Moderate amid External Headwinds and Domestic Structural Challenges

SINGAPORE, December 21, 2018 – Following a strong rebound in 2017, the Korean economy is expected to moderate in 2018-2019 amid headwinds from global trade conflicts and domestic structural challenges, according to the 2018 Annual Consultation Report on Korea published by the ASEAN+3 Macroeconomic Research Office (AMRO) today. The report was prepared on the basis of AMRO’s Annual Consultation Visit to the country in August/September 2018 and data availability as of October 31, 2018.

The Korean economy is projected to grow at 2.7 percent in 2018 and moderate to 2.6 percent in 2019. Strong exports in the information and communications technology (ICT) sector, increased fiscal spending, and continued improvement in private consumption will be the main drivers of growth, while investment will continue its correction. Headline inflation is expected to settle at 1.6 percent in 2018 and rise to 1.9 percent in 2019, just below the 2-percent inflation target set by the Bank of Korea.

Korea’s external position is resilient to external shocks on the back of sustained current account surpluses and ample international reserves. Moreover, Korea has continued to build up its net creditor position. Residents’ overseas portfolio investment has been growing, led by increasing assets of pension funds and insurance. As for non-resident portfolio investment, despite wider spreads between the Korean and the U.S. Treasury bonds and increasing risk aversion towards emerging markets, Korea’s bond market has continued to attract inflows, supported by strong macroeconomic fundamentals and a sound external position.

In the near term, weaker-than-expected growth in China and advanced economies and an escalating U.S.-China trade conflict pose downside risks to Korea’s highly-open economy. Over the medium- to long-term, Korea’s potential growth continues to face structural challenges stemming from an aging population, youth underemployment, and excessive concentration on ICT industries.

Risks and vulnerability stemming from high household debt and rising housing prices are limited to certain groups of borrowers and districts. A series of tightened measures has curbed the build-up of household debt and the increase in nationwide housing prices. However, low-income borrowers are still vulnerable and may pose a risk to financial institutions in the event of a sharp rise in interest rates and deterioration in the labor market. In the property sector, the housing prices in Seoul had risen rapidly until the government announced additional policy measures to stabilize the housing market in September 2018.

An appropriate policy mix should be calibrated to support growth while maintaining financial stability. The active use of fiscal policy to pursue more inclusive growth and promote innovation-led growth while maintaining long-term fiscal sustainability is commendable. In view of moderating economic growth and subdued inflation, the accommodative monetary policy stance should be maintained to support the economy, particularly in view of downside risks from the escalation of global trade tensions. Regarding the build-up of financial imbalances, the government’s continuing and timely efforts to stabilize the housing market and to curb household borrowing are commendable.

The government’s efforts to shift towards a new growth paradigm could well address the issue of jobless growth and growing income disparity in recent years. However, to be effective, the strategy should be implemented in a well-coordinated manner. In particular, income policy should be well executed to avoid creating adverse consequences in the labor market and should be complemented by growth-oriented policies and expanding social safety nets. Ongoing efforts to promote innovation and to enhance fair competition between large corporations and small and medium-sized enterprises are welcome but should be expedited. Moreover, structural reforms in the service sector and non-ICT manufacturing industries should be stepped up to enhance productivity and competitiveness as well as to create more quality jobs.

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. AMRO’s is to conduct macroeconomic surveillance, support the implementation of the regional financial arrangements, the Chiang Mai Initiative Multilateralisation (CMIM), and provide technical assistance to the members.

The Annual Consultation Report was prepared in fulfilment of AMRO’s mandate. 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 provides policy recommendations to mitigate such risks.

Media Contact

Huong Lan Vu
Public Relations Officer

Tel: +65 6323 9844
Email: vu.lanhuong@amro-asia.org