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  • KDI Economic Outlook 2019-2nd Half
  • Date November 13, 2019
  • Language Korean
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Ⅰ. Current Economic Conditions

The Korean economy is exhibiting slow growth led by exports and investments as domestic and foreign demand contract.
  • The government maintains an accommodative fiscal stance in response to downward economic pressure, significantly contributing to economic growth.
Domestic demand appears sluggish in both consumption and investment, and stagnating exports due to weak overseas demand have become a major constraint to economic growth.
  • Private consumption declined, mainly in consumer goods consumption, on a drop in the GDI.
  • Facilities investment is stagnant due to investment adjustments in the semiconductor industry, and construction investment exhibited continued losses, especially in the housing sector.
  • Exports (amount) plummeted on shrinking export volume and prices while imports declined as well, reflecting the weak demand.
  • However, the composite index found support after falling sharply, and sentiment indices appear to be improving slightly.
Considering the overall economic conditions at home and abroad, the economic slowdown is not likely to accelerate in the future, but a number of downside risks could restrict the growth of the Korean economy.

Therefore, in the short-term, the government should take on an expansionary stance, focusing on macroeconomic stability.
  • Korea’s economic growth could rally slightly if external economic conditions gradually improve in 2020, but the pace of recovery in the private sector will likely be limited.
  • An expansionary fiscal stance should be maintained to support the economic recovery while monetary policies are further eased to overcome low inflation.
The Korean economic structure must become more flexible in order to preemptively adapt to the rapidly changing economic environment and to foster economic vitality in the private sector.
  • Even taking into account the shrinking domestic and foreign demand, the fact that the contribution of the private sector to economic growth has fallen significantly implies the possibility that Korea’s growth potential is rapidly dwindling.
  • An economic environment should be created in which the human and physical resources in the private sector are seamlessly relocated to high value-added sectors to enable rapid technological progress, e.g. artificial intelligence and autonomous driving, to fortify potential growth.
Above all, more quality jobs should be created through the development of the service industry to absorb the impact of labor substitution brought on by technological progress.
  • The share of employment in the manufacturing industry is declining as the economy matures and technology advances, while the demand for services rises at a fast pace. However, the productivity of the service industry remains low.
  • More quality jobs would be created if the labor-intensive service industry grows via improved productivity.
  • To that end, active leadership is needed that can efficiently coordinate conflicts among stakeholders anticipated in the process of technological progress and service market expansion and that will also distribute the benefits of growth across the entire economy.

Ⅱ. Domestic Economic Outlook for 2020

1. Expected External Conditions

The global economy will grow at a slightly faster pace in 2020.
  • Recently, the IMF projected that the global economy will grow at a low rate of 3.0% in 2019 due to trade disputes and sluggish manufacturing, and then climb to 3.4% in 2020 as emerging countries recover at a modest pace.
Crude oil prices (Dubai) will be around $60 per barrel in 2020, down by 5% from 2019.

The value of the Korean won, in terms of the real effective exchange rate, will ascend by about 1% in 2020.

2. Outlook for Domestic Economy

Korea is forecast to grow around 2.3% in 2020, slightly up from 2019 (2.0%) as improvements in domestic demand and exports remain limited.
  • Private consumption will show a slight recovery as consumption sentiment bounces back but the GDI improves slowly.
  • Facilities investment will grow at a favorable pace influenced by the recovery in semiconductor demand and the base effect.
  • Construction investment will exhibit a smaller contraction as the decline in the construction sector is partially offset by the civil engineering sector.
  • Exports will improve gradually on an increase in commodity exports spurred by the increase in investment demand in emerging countries.
The current account in 2020 is projected to run a surplus similar to 2019 as both exports and imports rise.

Headline inflation is expected to remain low as domestic demand shows some improvements but welfare policies are expanded amid a drop in expected inflation.

The unemployment rate is expected to reach 3.5%, down from 2019 (3.8%), due to the slow recovery in economic growth and government job creation projects.
  • The number of employed persons will grow around a low 200,000 in 2020, slightly down from 2019 (high 200,000), thanks to the buffering effect of the gradual economic improvements and job creation projects against a shrinking working-age population (aged 15-64).

3. Risks

A reemergence of external downside risks, such as the US-China trade dispute, will delay the recovery of the Korean economy.
  • The recovery may be hampered if some of the lingering external uncertainties intensify, e.g. US-China trade dispute, Brexit, and the geopolitical tensions in the Middle East.
  • On the other hand, a rapid recovery in the global demand for semiconductors will spur Korea’s growth in 2020.
  • Internally, a rise in real interest rates on a drop in expected inflation could limit improvements in domestic demand, weighing down the economic recovery.



Ⅲ. Policy Recommendations

1. Fiscal Policy

The expanded 2020 budget (bill)―from 2019―has strengthened the role of government finance by countering the drop in domestic and foreign demand.

Fiscal sustainability must be secured by gradually reducing the fiscal account deficit so that the national debt ratio can be stabilized in the medium-term.
  • It is necessary to induce a similar pace of growth in total government revenue and expenditure through fiscal restructuring and revenue mobilization in order to control the pace of debt accumulation driven by fiscal deficit.

2. Monetary Policy

A more accommodative stance should be taken in regards to monetary policy to respond to low inflation and downward pressure.

The current monetary policy management system, of which financial stability is one of the explicit goals, could restrict efforts to tackle disinflation by cutting the base rate. As such, the system should be revised to allow monetary policy to concentrate more on its original responsibility―price stability.
  • Financial stability needs to be understood within a larger framework of macroeconomic stability, instead of being one of the primary goals of monetary policy.
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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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