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Friday, June 01, 2018
South Korea – current state of the economy and future outlook
South Korea is well known for its spectacular rise from one of the poorest countries in the world to a developed nation with high income in just one single generation. This economic miracles commonly known as the Miracle on the Han River brought South Korea to the ranks of elite countries in the OECD and the G-20 and made its mark on history. South Korea ranks 11th among all of the world’s economic powers.
South Korea depends mainly on the International trades thus making it also very highly sensitive and vulnerable to a variety of external influences. GDP had stagnated for about two years before it kicked up to 3.1% in 2017, the GDP growth was mainly due to a good rebound in household consumption, improvement of the real estate sector and also fiscal and quantitative easing measures. This rebound supported by growth in international trade and greater fiscal support should help maintain growth at around 3% through 2019 to 2020.
In 2017 budget, a recordamount was allocated to defense as tensions were rising with North Korea. Thebudget focused on supporting job creation, health and well-being of the people.The country, however, faces structural challenges too with the underdeveloped financialmarket, population aging and its dependency on exports. However, reducedgeopolitical tension on the Korean peninsula could lead to improved consumerand business confidence.
South Korean per capita income as of today has increased to USD 30,000 from USD 100 in 1963. The unemployment rate has seen to be decreasing (3.7%) even as the number of irregular works is very high; socialin equalities are also deepening as the social ties continue to deteriorate.That has prompted the government to create 230,000 jobs in public sector for2018 and encourage pension funds to invest more in small-cap KISDAQ stocks to augment innovation. In the medium and longer term, South Korea has pledged tos pend more on preparing measures to tackle low birth rate, elderly poverty and low employment among women.
There are few main sectors/industries like textile, steel, car manufacturing, ship-building and electronics that contribute to the country’s GDP. These industries approximately represent 38.8% of the GDP and employ about 24.1% of the workforce, while the other majority comes from the service sector which accounts to 59.1% of GDP and employs 71% of the active population. South Korean agriculture sector only makes a trivial contribution to the country’s GDP (2.2%) and employs only 4.9% of the active population. South Korea’s mineral resources are limited to Gold and silver only.
Looking at the 1st quarter of 2018, the economy returned to grow buoyed by an ongoing exports recovery and corporate investment. GDP expanded 1.1% in the first 3 months of this year from the previous quarter, when it contracted 0.2 percent, the Bank of Korea said. From a year earlier, the economy expanded 2.8%, compared with the 2.9% median estimate of economists. Growth in the export of semiconductors led this expansion. The Bank of Korea and the government both expect 3% GDP growth this year. Yet employment and consumption have been lackluster, and contained inflation will likely mean the central bank remains cautious about raising borrowing costs.
Private consumption grew slower than expected, while construction and facilities investments outperformed. After a strict property market regulation was introduced, construction investment got a boost by increased housing transactions. The facilities investment was led by the ship-building, aircraft, semiconductor-manufacturing devices and machinery sectors.
Looking into the numbers now; exports, as measured by volume in GDP, increased 4.4% in the first quarter from the previous period, when it fell 5.3%. Infrastructure investment was up 5.2% and construction investment up 2.8% of the prior quarter when both had contracted. Government spending increased 2.5% mainly due to a policy change that increased the government’s support for public health insurance. Private spending edged up 0.6%. Some of the expansion is probably due to the quarter-on-quarter comparison, with the contraction in 2017.
International agencies including WB, IMF, UN, EC, and OECD say that real GDP growth in South Korea reached the peak of 6.5% in 2010 following the all-time low of 0.7% in 2009. However, all graphs show GDP growth remaining stable at 2.7% for last two years.
UN and EC predict it to stay at the same level while IMF expects GDP growth to rise to 3% and stabilize after that. The Bank of Korea held its economic growth forecast at 3% for 2018, the same as that of the International Monetary Fund and the Economic Cooperation and Development. However, analysts and some global investment banks recently set their predictions slightly below 3%, as the super-cycle for semiconductors, a key economic driver, was expected to near its peak in the latter half of this year.
The strengthening of local currency and uncertainties in the oil market are also cited as downside risks for Asia’s fourth-largest economy, which heavily relies on exports. Leading economic indicators also showed hurdles for the government to achieve its growth target. The latest composite leading indicator compiled by the OCED stood at 99.6, falling below 100 for the third consecutive month. A figure below the benchmark signals economic slowdown. Bank of Korea Gov. Lee Ju-yeol said the Korean economy faces strong headwinds at home and abroad, citing global uncertainties and rising trade tension between the United States and China. The country’s job creation remains weak—the number of new jobs in the backbone manufacturing sector declined amid restructuring in the labor-intensive shipping and auto industries. Earlier, the central bank lowered its estimate for job creation to 260,000 from an earlier projection of 300,000. At the same time, household debt is on a steady rise and surpassed 1,450 trillion won ($1.34 trillion) last year, with numbers continuing to rise.