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  • KDI Economic Outlook 2019-1st Half
  • Date May 22, 2019
  • Language Korean
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Ⅰ. Current Economic Conditions

Overall economic activities in the Korean economy have been sluggish as the growth in domestic demand slows on shrinking investment and export growth receded.
  • Production in construction swung to a decrease and the GDI growth, which significantly affects real purchasing power, is sliding fast on falling exports and worsening terms of trade.
On the demand side, investment continues to decline, consumption growth is slowing and exports are exhibiting a steep contraction from this year, pointing to overall weakness in aggregate demand.
  • Facilities investment remains on a rapid downward trajectory as export prospects, coupled with the base effect from the adjustment in semiconductor investment, deteriorate amid consistently low capacity utilization rates in most manufacturing industries.
  • Construction investment remains weak overall as the civil engineering sector continues to descend and the building construction sector shrinks led by housing.
  • The positive response in private consumption towards government-financed projects has acted to buffer the sluggish demand, but its growth is gradually slowing on the decrease in GDI growth.
  • Amid the slowing growth of the global economy, exports are decelerating further as semiconductors enter an adjustment phase after booming until 2H 2018.
From a long-term perspective, Korea’s recent economic sluggishness is seen as a phenomenon that stems from the economy gradually approaching to a slow growth trend following the global financial crisis.
  • Growth in the global economy is rapidly weakening as the rebound trend over the past 2-3 years driven by the expansion in the US economy fades.
Considering the recent changes in internal and external economic conditions, in the short-term, the government should take an expansionary stance in terms fiscal and monetary policies to secure economic stability by preemptively responding to the decline in domestic and overseas demand.
  • However, temporary increases in growth should not become indicators for policy performance to prevent economic agents’ expectations over the policy effects from becoming overly focused on the short-term.
Rather, policies should be focused on enhancing productivity in the mid- to long-term to create an environment wherein economic agents can fully demonstrate their capabilities.
  • As concerns grow over the effects of population aging on sustainability, policy development and implementation should be aimed at improving long-term productivity.
  • In order to bridge the efforts to improve productivity and stronger long-term growth potential, it is important to establish and maintain the necessary social and economic environments.
    - The government should work to minimize uncertainties in the economic environment by securing fair market competition and lawful order while holding on to reasonable countermeasures and consistency in response to the various demands of interest groups.
  • Under such social and economic conditions, consistent efforts must be made to reform the inefficient elements of the Korean economy to build a system that can effectively reallocate human and physical resources.
  • Furthermore, efforts must be accelerated to formulate and implement policies that improve Korea’s economic structure in a direction that would enhance equity and efficiency in a balanced manner.

Ⅱ. Domestic Economic Outlook for 2019

1. Assumed External Conditions

The global economy will grow at a slower pace in 2019 than in 2018 and exhibit a modest recovery in 2020.
  • The IMF forecasts that the global economic growth will slow to 3.3% in 2019 from 3.7% in 2018 led by major countries such as the US, China and Europe, followed by a moderate recovery in 2020.
Crude oil prices will be similar to 2018 at $70 per barrel in 2019―this will likely recede by 5% to around $66 in 2020.

The value of the Korean won, in terms of the real effective exchange rate, will descend by about 3% in 2019 and remain little changed in 2020.

2. Outlook for Domestic Economy

Korea is forecast to grow 2.4% in 2019 influenced by the decline in both domestic demand and exports and will likely recover at a moderate rate to around 2.5% in 2020.
  • Private consumption will grow at a relatively low rate due to limited real purchasing power on slowing economic growth and worsening terms of trade.
  • Led by semiconductors, contracting exports are exacerbating the decline in facilities investment. But, there will be a gradual recovery as the global economy improves.
  • Construction investment will stay in a slump as the building construction sector recedes led by housing.
  • Exports will be sluggish for the time being due to slowing global growth and weakening export competitiveness, but will likely recover at a modest pace thereafter.
The current account is projected to run a slightly decreased surplus due to slowing export growth and worsening terms of trade.

Headline inflation is expected to remain low as Korea’s economic growth slows amid continued low inflationary pressure on the supply side and gradually decreasing expected inflation.

Despite sluggish economic activities, unemployment growth is projected to record 3.9% in 2019 and 3.8% in 2020, similar to the 3.8% in 2018, influenced by the government’s job creation projects.
  • The number of employed persons is expected to record around 200,000 and mid-100,000 in 2019 and 2020, respectively, up from 2018 (97,000).

3. Risks

Externally, the growing US-China trade disputes and uncertain recovery prospects for semiconductor demand (when and to what degree) could have a considerable impact on the growth of the Korean economy.
  • Amid the slowdown in two of Korea’s major export partners, the trade dispute between the US and China pose a serious threat to the growth of the Korean economy if they remain unresolved.
  • The global demand for semiconductors, a key driver of Korea’s economic growth in 2017-2018, started to descend from 2H 2018. The growth rate for this year and next will be largely determined by when and how much the demand recovers.
Internally, the short-term side effects from the changes in labor market policies could pose downside risks while a spread of tangible outcomes from reinforced social safety net policies will serve as an upside risk.
  • Labor market policies adopted certain changes for minimum-wage increases and shorter working hours, entailing side effects that could weigh on economic growth.
  • On the other hand, if the social safety net policies, e.g. basic pension and earned income tax credit, are able to increase private consumption, the Korean economy will improve more than expected.



Ⅲ. Policy Recommendations

1. Fiscal Policy

Fiscal policies need to actively respond to the additional fiscal demand while detailed lists of expenditure items must be reviewed closely when discussing a supplementary budget to minimize the effect on fiscal soundness.
  • Although the plan to increase government bond issuances to allocate a supplementary budget does not appear excessive, detailed lists of expenditure items must be reviewed and financed strictly based on the principle that the expenditure is not to be permanent, taking into account the characteristics and legal requirements of the supplementary budget.
Given that the growth in tax revenue is projected to slow, the government should make continuous efforts to improve fiscal sustainabiliy by promoting more efficient management through a strong restructuring of fiscal expenditure.


2. Monetary Policy

An expansionary stance should be adopted in terms of monetary policy taking into account the continued low inflation and economic slowdown while making room for flexible responses to changing economic situations.
  • In light of the recent low inflation (0% level) and shrinking domestic and overseas demand, monetary policies need to be expansionary enough to keep pace with the pending situation.
Meanwhile, the monetary authority should communicate with the markets using explicit definitions of and standards for the inflationary target while taking a cautious approach to prevent economic agents’ expected inflation from being kept at a constantly low level due to the prolonged low inflation.
  • ‘Price,’ as an inflationary target, should be defined clearly and managed consistently in such a way that will enhance the projection ability of economic agents in terms of future economic environments, including monetary policy.
  • It should be noted that inflation hovering below the target over an extended period indicates the possibility that the expected inflation could also be stuck at a low level.
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Office of Global Economy
Providing Economic Forecast and Macroeconomic Policy Direction, the Groundwork for a Brighter Future

The Department of Macroeconomics is conducting researches on the macro economy and macroeconomic policy, particularly focusing on suggesting the analysis of macroeconomic trends and current status of the economy at home and abroad, the economic forecast, and the policy direction of the macro economy. The Department is also in charge of establishing, sustaining and maintaining various econometric models, based on which it analyses policy effects and develops a long-term economic forecast.

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  • Economic trend analysis, short- and long-term forecast
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