What is the current economic situation in South Korea?

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What is the current economic situation in South Korea? Is the country growing? Are interest rates and inflation high? How was the country impacted by the global financial crisis? Has the country recently had any other financial crises? Is it a good time to export to or import from South Korea?
You need to address the question and you can use data from the document attached. Please provide your argument based on sources and data._________________________________________________________________________________________________________________________________________________________
Country Report
South Korea
Generated on February 7th 2018
Economist Intelligence Unit
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South Korea
Summary
Briefing sheet
Outlook for 2018-22
Political stability
Election watch
International relations
Policy trends
Fiscal policy
Monetary policy
International assumptions
Economic growth
Inflation
Exchange rates
External sector
Forecast summary
Quarterly forecasts
Data and charts
Annual data and forecast
Quarterly data
Monthly data
Annual trends charts
Quarterly trends charts
Monthly trends charts
Comparative economic indicators
Summary
Basic data
Political structure
Recent analysis
Politics
Forecast updates
Economy
Forecast updates
Analysis 24556667788889
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South Korea
1
Country Report January 2018 www.eiu.com © Economist Intelligence Unit Limited 2018
Briefing sheet
Editor: Agathe L’Homme
Forecast Closing Date: January 15, 2018
Political and economic outlook
The president, Moon Jae-in, will serve out a full five-year term in
office. The ruling Minjoo Party’s shallow majority in the National
Assembly (parliament) means that policymaking will continue to rely
on cross-bench support until the parliamentary elections in 2020.
Moon Jae-in’s re-engagement efforts with North Korea will provide deescalation
channels, but the North will continue its nuclear
programme. The Economist Intelligence Unit therefore expect the USSouth
Korea security relationship to remain strong.
The current administration will pursue an ambitious demand-driven
economic growth agenda through increased government spending
and redistributive policies. However, we expect the dominance of the
chaebol (family-run conglomerates) to continue over 2018-22.
We expect real GDP growth to average a subdued 2.7% a year in 2018-
22. This reflects our expectation of marked slowdowns in the US and
China over the next five years. Both are major markets for South
Korean goods, and so this will hit local export growth.
Consumer price inflation is forecast to remain modest in 2018-22, at an
annual average of 1.8%, as global oil prices remain relatively low.
The current account will remain in surplus during the forecast period,
at the equivalent of 5.8% of GDP on average. The trade surplus will
continue to offset deficits on the services and secondary income
accounts.
South Korea
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Country Report January 2018 www.eiu.com © Economist Intelligence Unit Limited 2018
Key indicators
2017a 2018b 2019b 2020b 2021b 2022b
Real GDP growth (%) 3.2c 2.5 2.6 2.4 2.9 3.2
Consumer price inflation (av; %) 1.9 1.8 1.7 1.4 1.9 2.1
Government balance (% of GDP) 0.9c -0.3 -0.1 -0.5 0.1 0.2
Current-account balance (% of GDP) 5.6c 5.4 5.7 5.5 6.3 6.0
Money market rate (av; %) 1.3 1.9 2.1 1.4 1.5 1.8
Unemployment rate (%) 3.7 3.8 3.7 3.8 3.7 3.6
Exchange rate W:US$ (av) 1,131 1,140 1,163 1,175 1,150 1,144
a
Actual. b
Economist Intelligence Unit forecasts. c
Economist Intelligence Unit estimates.
Key changes since December 12th
Based on the latest available data, we have revised up slightly our fiscal balance estimate for
2017: while spending kept a steady pace, tax revenue increased at an even faster rate owing to
strong GDP growth. Our forecasts for 2018-22 are unchanged.
In the light of the won’s steep appreciation in late 2017, we have revised our exchange-rate
forecast for 2018 and factored in a smaller depreciation. We now expect the won to weaken
from an average of W1,131:US$1 in 2017 to W1,140:US$1 in 2018.
The month ahead
January 24th—Preliminary GDP (Q4 2017): In line with the strong year-on-year growth rates
recorded in the first three quarters of 2017, we expect a solid expansion in the final quarter. We
estimate that the economy expanded by 3.2% in 2017 as a whole.
January 31st—Consumer price index (January): We expect relatively low inflationary
pressure to persist in the coming months, with consumer price inflation trending below the 2%
target of the Bank of Korea (South Korea’s central bank).
February 1st—Trade data (January): After a record trade performance in 2017, we still expect a
deceleration in export growth in 2018. We forecast that cyclical demand for key South Korean
products, including semiconductors, will moderate progressively.
Major risks to our forecast
Scenarios, Q4 2017 Probability Impact Intensity
South Korea
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Country Report January 2018 www.eiu.com © Economist Intelligence Unit Limited 2018
Outlook for 2018-22
Political stability
The Economist Intelligence Unit expects the president, Moon Jae-in of the Minjoo Party (the
liberal-leaning ruling party), to serve out his constitutionally mandated five-year term. The
implementation of Moon Jae-in’s ambitious social and economic policy agenda is making steady
progress despite the difficult parliamentary dynamic. With 121 out of 300 seats in the National
Assembly (parliament), Minjoo lacks the three-fifths majority required to pass legislation
unilaterally. However, the administration can rely on the president’s continued popularity—his
approval rate hovered above 70% in December 2017—to negotiate cross­bench support. The main
opposition party, the conservative Liberty Korea Party (LKP, formerly known as the Saenuri
Party), intends to act as an obstructionist force in parliament given its 116 seats, but has so far
managed only to delay the legislative agenda marginally. This was illustrated by the adoption of
the 2018 budget in December 2017: although delayed slightly, the law included major reforms on
taxes, wages and labour, which are at the core of Moon Jae-in’s redistributive policy orientation.
Minjoo’s popularity has also resulted in dwindling public support for centrist parties. This led the
centre-left People’s Party (PP) and the centre-right Bareun Party to agree to merge in early January
2018. By joining forces, Bareun and the PP hope to remobilise the moderate vote and offer a
credible alternative to the two main parties, Minjoo and the LKP, ahead of the local elections
scheduled for June 2018. The likelihood that the new entity will be steamrolled by Minjoo is high,
however. In any case, the new centrist party will suffer from the same woes as the PP: it will
struggle to establish itself as either a solid ally of Minjoo or as a major opposition force ahead of
the next legislative election in April 2020.
The situation in North Korea traditionally divides hawkish conservatives and dovish liberals, but
we do not expect the ongoing tensions around the North’s rapid progress towards full
nuclearisation to have a destabilising effect on South Korea’s domestic politics. Moon Jae-in is
starting to reap some successes on his policy of engagement with the North. The latter’s
agreement to participate in the Pyeongchang Winter Olympics, which will be held in South Korea
in February 2018, is a major political win for the South Korean president. Meanwhile, Moon Jaein’s
commitment to deepening security ties with the US leaves little room for the conservative
opposition to paint the liberal president as weak on the foreign policy front.
Moon Jae-in will, however, be judged by his liberal political support base mainly on his success in
delivering his socio-economic pledges. Should progress on these stall, it would pose risks to
Moon Jae-in’s popularity and, therefore, to his party’s negotiation power. This would have a
significant negative impact on the efficiency of policymaking. Nonetheless, we expect that
political stability will continue to be supported by the country’s efficient bureaucracy.
The central bank embarks on an aggressive tightening of monetary policy Moderate High 12
The rising number of splintered political parties halts policymaking Moderate High 12
Despite ambitious plans to expand the highway system, severe traffic
congestion causes delays High Moderate 12
Stimulus efforts imperil the government’s fiscal position and lead to higher
taxes High Moderate 12
Slumping profitability forces South Korean banks to reduce lending Moderate High 12
Note: Scenarios and scores are taken from our Risk Briefing product. Risk scenarios are potential
developments that might substantially change the business operating environment over the coming two
years. Risk intensity is a product of probability and impact, on a 25-point scale.
Source: The Economist Intelligence Unit.
South Korea
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Country Report January 2018 www.eiu.com © Economist Intelligence Unit Limited 2018
Election watch
The next nationwide ballot is the legislative election due in April 2020. The last such poll took
place in April 2016, and the president does not have the power to dissolve parliament and call
early elections. The ruling party will campaign on the unique opportunity for voters to improve its
legislative position and reduce the obstructionist power of the opposition. A first test will be the
upcoming local elections, due in June 2018, when we expect Minjoo to perform well. According to
a poll in late December by the JoongAng Ilbo newspaper, the ruling party is set to win all five key
races (mayoral contests in the capital, Seoul, Incheon and Busan, and gubernatorial elections in
the provinces of Gyeonggi and South Gyeongsang). We believe that the polarisation of politics
will continue in the next two years, owing to heated debates over the government’s redistributive
policies and North Korea strategy, which have traditionally split conservatives and liberals. With
the centrist parties already showing signs of fading, we consequently expect Minjoo’s electoral
strategy in 2020 to focus on attracting liberal voters drifting from the political centre. This will be a
tall order. However, if South Korea follows a better economic growth track than we currently
forecast over 2018-20, this may buoy Minjoo’s popularity and lift its representation in parliament.
International relations
The North Korean issue will continue to dominate Moon Jae-in’s term in office. Despite the
positive developments in early January, with high-level talks held between North and South
Korea, we expect the Northern regime’s aggressive pursuit of its nuclear and missile programmes
to remain a significant security risk to South Korea. Owing to fundamental differences on the
nuclear issue, further rapprochement, such as a meeting between the leaders of the two countries
—Kim Jong­un in the North and Moon Jae­in in the South—is unlikely.
Nevertheless, modestly improved bilateral ties will ease the risk of a major military confrontation
as the international community, led by the US, maintains its pressure on North Korea to end its
nuclear programme. South Korea has deeply entrenched security ties with the US, which we
expect Moon Jae-in to maintain. A more arduous task for the president will be to influence the
North Korean strategy of his US counterpart, Donald Trump, and to maintain peace on the
peninsula. The US’s agreement to postpone an annual joint military exercise until after the
Pyeongchang Winter Olympics offers a rare window of opportunity for Moon Jae-in’s
engagement efforts. However, we believe that the South Korean president will still struggle to get
a greater say in the US’s policy towards North Korea.
Ties with China are recovering from the strain of intense Chinese opposition to the deployment of
the US-built Terminal High-Altitude Area Defence (THAAD) anti-missile system. We expect that
the agreement in October 2017 between the two countries to “normalise” their relationship will
lead to the progressive easing of China’s economic retaliatory measures against South Korea.
However, these have done lasting damage to the bilateral relationship, and ties are unlikely to
regain their previous level of warmth in 2018-22. Although China has long been an advocate of
inter-Korean talks, its unwillingness to crack down seriously on the North’s progress towards
becoming a nuclear power with intercontinental ballistic missile capabilities will continue to make
it an unreliable security partner for South Korea in the near future.
Despite the North Korean threat and the need to explore closer security co operation between the
two main US allies in the region, South Korea’s relations with Japan will remain prone to spats.
Negative perceptions of the former colonial power will continue to linger among the South Korean
public. The most visible source of historical tensions will remain the issue of South Korean
“comfort women” (who were forced to act as sex slaves for the Japanese military during the
second world war). A broad and lasting improvement in bilateral relations is unlikely, but such
tensions will not affect economic ties.
South Korea
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Country Report January 2018 www.eiu.com © Economist Intelligence Unit Limited 2018
Policy trends
In a significant departure from the supply-side-oriented policies pursued by South Korea’s most
recent conservative administrations, Moon Jae-in intends to implement an ambitious demanddriven
economic policy, with emphasis on a “people-centred economy” and “income-led growth”.
The liberal government aims to address rising concerns about income inequality and job security
—the most pressing issues for young people, whose rate of unemployment has been rising over
the past few years. Recent economic policies—such as measures to alleviate debt pressure on
households, raise taxes on corporate entities and the wealthiest and increase the minimum wage—
aim to redistribute wealth and level the playing field between small and corporate players. Fiscal
policy has focused on job creation (mainly in the public sector) and extending welfare benefits.
Moon Jae-in appears less concerned than his predecessor, Park Geun-hye, about the need to
diversify the economy away from exports and into high-value services, such as artificial
intelligence. This should help to ensure industrial policy continuity. Given this background, the
chaebol (powerful family-owned conglomerates) are likely to remain at the forefront of South
Korea’s export-oriented economy, despite the high-profile corruption case against Park Geun-hye
and the conviction of the vice-chairman and de facto leader of the Samsung Group, Lee Jae-yong.
Modest progress on the issue of corporate governance reform will still be achieved under the
current administration, mainly through amendments to the Monopoly Regulation and Fair Trade
Act that strengthen the regulatory framework around the chaebol and its enforcement.
Fiscal policy
We expect the administration to maintain the loose fiscal policy stance adopted by the previous
government in order to boost economic growth. The new administration raised the 2018 budget by
7.1%, to W429trn (US$376bn), in the largest budget increase since 2009, when the country was
dealing with the aftermath of the global financial crisis. Around 33% of total spending will be
allocated to health, welfare and labour. This represents a 12% rise compared with the 2017 budget.
Defence is the next highest priority with a 7% increase in spending, and officials expect to finance
these changes by slashing expenditure on social overhead capital, such as maintenance of public
infrastructure.
The government expects to continue expanding its budget in the next five years, targeting an
average annual increase of 5.8%. However, this plan is based on an overoptimistic growth
outlook, with the government expecting tax collection to increase by 11% in 2018. We forecast
that this rosy outlook will be derailed by a marked slowdown in China’s economy in 2018 and in
the US in 2020. Based on consolidated expenditure and revenue numbers (which include social
security funds such as pensions), we forecast that the budget balance will slip into the red in
2018, and the government will post small deficits in 2018-20. A modest economic recovery from
2021 onwards will help to return the budget to a slight surplus by the end of the forecast period.
Monetary policy
The Bank of Korea (BOK, South Korea’s central bank) raised its policy interest rate, the base rate,
from a record low of 1.25% to 1.5% at its regular policy meeting in November 2017. In line with its
view of a sustainable economic recovery trend, the bank hinted at another rate increase by mid2018.
However, we are less bullish on the BOK’s ability to continue with even modest mone tary
policy tightening owing to our forecast of a policy-induced economic slowdown in China this
year. Monetary policy divergence with the US, where the Federal Reserve (Fed, the US central
bank) will accelerate its tightening cycle, will exert depreciatory pressure on the won, but we
expect the BOK to prioritise supporting the domestic economy in 2018. With economic conditions
picking up in 2019, we believe that the BOK will resume progressive policy rate increases before
putting them on hold again in 2020, as the US records a technical recession early that year and the
Fed aggressively cuts its interest rates. As GDP growth accelerates and inflationary expectations
start to build in 2021 22, the BOK will proceed with new interest­rate rises, resulting in a 150­basispoint
increase by the end of the forecast period compared with end-2017.
South Korea
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Country Report January 2018 www.eiu.com © Economist Intelligence Unit Limited 2018
International assumptions
2017 2018 2019 2020 2021 2022
Economic growth (%)
US GDP 2.2 2.2 2.3 0.9 1.9 1.8
OECD GDP 2.3 2.1 2.0 1.3 1.9 1.9
World GDP 2.9 2.8 2.8 2.3 2.8 2.7
World trade 4.6 3.5 3.7 2.7 3.7 3.7
Inflation indicators (% unless otherwise indicated)
US CPI 2.1 2.2 2.3 1.3 1.8 1.9
OECD CPI 2.1 2.0 2.0 1.7 1.8 1.9
Manufactures (measured in US$) 3.5 4.2 4.0 2.9 4.0 3.3
Oil (Brent; US$/b) 54.5 59.0 57.5 54.5 58.8 62.0
Non-oil commodities (measured in US$) 7.5 1.6 0.8 -2.3 2.1 1.4
Financial variables
US$ 3-month commercial paper rate (av; %) 1.1 1.7 2.5 2.3 1.5 1.8
¥:US$ (av) 111.8 109.0 106.8 104.0 100.0 100.2
W:US$ (av) 1,131 1,140 1,163 1,175 1,150 1,144
US$:€ (av) 1.13 1.17 1.16 1.20 1.20 1.24
Economic growth
We expect real GDP to grow by an average of 2.7% a year in 2018-22. We forecast that
diversification away from South Korea’s export-led growth model will not be achieved within our
forecast period. This means that the fate of the economy will remain tied to global trade prospects,
as well as the performance of exports in established and new markets. China will remain a source
of both opportunity and distress. We forecast that rising Chinese incomes in 2018-22 will provide
opportunities for consumer-oriented South Korean exporters. However, the threat of economic
pressure, as illustrated by the THAAD dispute in 2017, will encourage exporters to diversify to
other markets. This trend will be strengthened by a slowdown in China’s economy in 2018, which
will further dampen sales targeted at the domestic Chinese market. (South Korean exports of
components for electronics products assembled in China for final sale in developed economies
such as the US and EU will also slow slightly in 2018, as the boost from new product releases seen
in 2017 fades.) In 2020 exports will again be hit by a technical recession in the US, South Korea’s
second-largest market. The export slowdowns that we expect in 2018 and 2020 are the key factors
behind our relatively weak average annual economic growth forecast for South Korea in the next
five years.
The government’s focus on redistributive policies will offer some support for private consumption
growth, which will average 2.2% a year in 2018-22, but the latter will remain constrained by the
burden of debt repayment, compounded by interest-rate increases. Rising youth unemployment
(and underemployment) and labour market distortions are also a cause for concern in the medium
to long term, although the government’s public job-creation agenda will ease the severity of the
problem in the short term. Growth in real government consumption, at 4.1% a year on average in
2018-22, will be faster than in the previous five years (3.6%), but will provide only a slight lift to
overall economic growth.
Economic growth
% 2017a 2018b 2019b 2020b 2021b 2022b
GDP 3.2 2.5 2.6 2.4 2.9 3.2
Private consumption 2.4 2.2 2.4 2.1 2.3 2.2
Government consumption 4.0 4.5 4.0 4.5 3.6 4.0
Gross fixed investment 9.5 2.5 5.0 1.8 3.6 3.8
Exports of goods & services 3.0 1.2 2.1 1.6 3.0 4.3
Imports of goods & services 8.4 2.0 3.3 0.9 3.5 3.8
Domestic demand 5.4 2.9 4.7 2.0 3.2 3.0
Agriculture -0.8 0.5 0.7 0.6 1.2 0.9
Industry 4.8 2.5 3.5 2.0 4.5 3.8
Services 2.3 2.5 2.1 2.7 1.8 2.8
a
Economist Intelligence Unit estimates. b
Economist Intelligence Unit forecasts.
South Korea
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Country Report January 2018 www.eiu.com © Economist Intelligence Unit Limited 2018
Inflation
Owing to our forecast of a moderate rise in global oil prices in 2018-22, we expect consumer prices
to increase by an annual average of 1.8% over the period. As one of the world’s largest oil
importers, South Korea will remain highly susceptible to unexpected shifts in global energy prices.
Inflation risks would also skew to the upside if the won were to depreciate more rapidly than we
currently expect in 2018-20. Changes in the producer price index reflect similar risks. After
declining by an average of 2% a year in 2013-16, producer prices rebounded by 3.3% in 2017
owing to a recovery in global commodity prices. We expect this trend to continue, albeit at a
weaker rate than in 2017, with producer prices increasing by an average of 1.7% a year in 2018-22.
Exchange rates
After appreciating against the US dollar in 2017, we expect that the local currency will come under
downward pressure in 2018-20, largely as a result of the more troubled outlook for external
demand. The narrowing interest-rate differential between South Korea and the US, as the Fed
raises its policy interest rate further in 2018-19, will add to depreciatory pressure. We expect the
won to weaken from an average of W1,131:US$1 in 2017 to W1,175:US$1 in 2020. It will then
strengthen on the back of improved global trade growth towards the end of the forecast period, to
an annual average of W1,147:US$1 in 2021-22.
External sector
As a proportion of nominal GDP, the current-account surplus will, on average, shrink over 2018-22
compared with 2013-17, mainly owing to volatile global trade conditions. We expect the currentaccount
surplus to average the equi valent of 5.8% of GDP over the forecast period, compared
with an estimated 6.5% in 2013-17. Goods exports will be hit by significant slowdowns in China
and the US, as well as increased competition for certain key export items from regional peers,
including China. However, import growth will also be subdued, helping to keep the trade account
in the black. The deficit on the services account will narrow as tourism flows from China rise in
2018-22. We expect the primary income account to maintain a small surplus over the forecast
period, while the secondary income account will remain in deficit.
Forecast summary
Forecast summary
(% unless otherwise indicated)
2017a 2018b 2019b 2020b 2021b 2022b
Real GDP growth 3.2 2.5 2.6 2.4 2.9 3.2
Industrial production growth 1.4 0.7 2.0 1.0 2.7 2.3
Gross fixed investment growth 9.5 2.5 5.0 1.8 3.6 3.8
Unemployment rate (av) 3.7c 3.8 3.7 3.8 3.7 3.6
Consumer price inflation (av) 1.9c 1.8 1.7 1.4 1.9 2.1
Consumer price inflation (end-period) 1.5c 2.2 1.6 1.6 2.0 1.8
Short-term interbank rate 3.5 3.5 3.6 3.7 3.8 4.0
Government balance (% of GDP) 0.9 -0.3 -0.1 -0.5 0.1 0.2
Exports of goods fob (US$ bn) 575.9 590.3 614.3 611.8 661.1 693.3
Imports of goods fob (US$ bn) -452.3 -467.8 -490.9 -492.1 -525.7 -554.2
Current-account balance (US$ bn) 86.0 86.1 93.2 92.0 111.0 111.2
Current-account balance (% of GDP) 5.6 5.4 5.7 5.5 6.3 6.0
External debt (end-period; US$ bn)d 375.4 368.0 359.7 365.6 368.1 372.0
Exchange rate W:US$ (av) 1,131c 1,140 1,163 1,175 1,150 1,144
Exchange rate W:US$ (end-period) 1,071c 1,172 1,160 1,170 1,140 1,140
Exchange rate W:¥100 (av) 1,011c 1,047 1,088 1,130 1,150 1,141
Exchange rate W:€ (av) 1,275c 1,337 1,343 1,404 1,380 1,415
a
Economist Intelligence Unit estimates. b
Economist Intelligence Unit forecasts. c
Actual. d
On a balance-ofpayments
basis; includes both foreign- and local-currency-denominated debt held by non-residents.
South Korea
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Country Report January 2018 www.eiu.com © Economist Intelligence Unit Limited 2018
Quarterly forecasts
Quarterly forecasts
2017 2018 2019
1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr
GDP
% change, quarter on quarter 1.1 0.6 1.5 0.2 0.7 0.5 0.4 0.7 0.7 0.6 0.8 0.8
% change, year on year 3.0 2.7 3.8 3.4 3.0 3.0 1.8 2.3 2.3 2.4 2.8 2.9
Private consumption
% change, quarter on quarter 0.4 1.0 0.8 0.5 0.5 0.4 0.3 0.6 0.7 0.6 0.8 0.8
% change, year on year 2.0 2.3 2.6 2.9 3.0 2.3 1.7 1.8 1.9 2.1 2.7 2.9
Government consumption
% change, quarter on quarter 0.5 1.1 2.3 1.5 -0.9 2.0 2.0 1.2 -0.9 1.4 1.8 2.3
% change, year on year 2.7 3.2 4.6 5.5 4.0 5.0 4.6 4.3 4.3 3.6 3.4 4.6
Gross fixed investment
% change, quarter on quarter 4.9 1.8 1.2 0.8 0.4 0.3 0.2 0.5 1.7 1.7 1.8 1.8
% change, year on year 10.4 9.6 9.2 8.9 4.3 2.7 1.7 1.4 2.7 4.1 5.8 7.3
Exports of goods & services
% change, quarter on quarter 2.1 -2.9 6.1 -2.1 0.3 0.2 0.1 0.3 0.7 0.6 0.8 0.8
% change, year on year 3.9 0.0 5.0 3.0 1.3 4.4 -1.5 0.9 1.3 1.7 2.5 3.0
Imports of goods & services
% change, quarter on quarter 4.8 -1.0 4.7 0.3 0.0 -0.2 -0.3 0.0 1.3 1.3 1.4 1.4
% change, year on year 9.9 6.4 8.5 8.9 3.9 4.8 -0.1 -0.4 0.9 2.4 4.1 5.6
Domestic demand
% change, quarter on quarter 2.0 1.7 0.6 1.5 0.3 0.2 1.1 0.2 3.1 -2.4 6.9 -2.8
% change, year on year 5.2 5.6 5.0 5.9 4.1 2.7 3.2 1.8 4.6 1.9 7.7 4.5
Consumer prices
% change, quarter on quarter 0.7 0.1 0.6 0.1 0.9 0.5 0.2 0.3 0.9 0.2 0.3 0.3
% change, year on year 2.1 1.9 2.3 1.5 1.7 2.0 1.7 2.0 1.9 1.6 1.7 1.7
Producer prices
% change, quarter on quarter 2.4 -0.8 0.3 0.0 1.4 -0.2 -0.1 0.3 0.5 0.0 0.3 0.0
% change, year on year 4.2 3.3 3.4 1.8 0.8 1.5 1.2 1.5 0.6 0.7 1.1 0.8
Exchange rate W:US$
Average 1,155 1,129 1,132 1,107 1,090 1,133 1,166 1,172 1,141 1,156 1,147 1,145
End-period 1,116 1,140 1,147 1,071 1,112 1,150 1,169 1,172 1,149 1,152 1,146 1,160
Interest rate (%; av)
Money market rate 1.2 1.2 1.2 1.3 1.9 1.9 1.9 1.8 1.8 2.1 2.2 2.3
Long-term bond yield 2.2 2.2 2.3 2.5 3.3 3.2 3.3 3.2 3.5 3.4 3.4 3.2
South Korea
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Data and charts
Annual data and forecast
2013a 2014a 2015a 2016a 2017b 2018c 2019c
GDP
Nominal GDP (US$ bn) 1,305 1,411 1,383 1,411 1,535 1,591 1,643
Nominal GDP (W trn) 1,429 1,486 1,564 1,637 1,736 1,814 1,910
Real GDP growth (%) 2.9 3.3 2.8 2.8 3.2 2.5 2.6
Expenditure on GDP (% real change)
Private consumption 1.9 1.7 2.2 2.5 2.4 2.2 2.4
Government consumption 3.3 3.0 3.0 4.3 4.0 4.5 4.0
Gross fixed investment 3.3 3.4 5.1 5.2 9.5 2.5 5.0
Exports of goods & services 4.3 2.0 -0.1 2.1 3.0 1.2 2.1
Imports of goods & services 1.7 1.5 2.1 4.5 8.4 2.0 3.3
Origin of GDP (% real change)
Agriculture 3.1 3.6 -0.4 -2.9 -0.8 0.5 0.7
Industry 3.3 3.1 2.4 3.3 4.8 2.5 3.5
Services 2.9 3.3 2.8 2.3 2.3 2.5 2.1
Population and income
Population (m) 50.2 50.4 50.6 50.8b 51.0 51.2 51.3
GDP per head (US$ at PPP) 32,785 33,828 35,497 36,859 38,573 40,298 41,871
Recorded unemployment (av; %) 3.1 3.5 3.6 3.7 3.7a 3.8 3.7
Fiscal indicators (% of GDP)
General government revenue 22.0 21.6 21.7 22.7 23.4 22.9 23.2
General government expenditure 21.0 21.0 21.7 21.6 22.5 23.2 23.3
General government balance 1.0 0.6 0.0 1.0 0.9 -0.3 -0.1
Public debt 40.5 43.7 45.7 45.5 43.4 42.6 41.8
Prices and financial indicators
Exchange rate W:US$ (end-period) 1,055 1,099 1,173 1,208 1,071a 1,172 1,160
Consumer prices (end-period; % change) 1.1 0.8 1.1 1.3 1.5a 2.2 1.6
Producer prices (av; % change) -1.6 -0.5 -4.0 -1.8 3.3 2.1 1.0
Stock of money M1 (% change) 9.7 13.6 20.9 12.3 10.0 7.1 15.0
Stock of money M2 (% change) 4.6 8.1 8.2 7.1 5.1 4.9 9.4
Lending interest rate (av; %) 4.6 4.3 3.5 3.4 3.5 3.5 3.6
Current account (US$ m)
Trade balance 82,781 88,885 122,269 120,446 123,534 122,569 123,466
Goods: exports fob 618,157 613,021 542,881 511,776 575,853 590,342 614,330
Goods: imports fob -535,376 -524,135 -420,612 -391,330 -452,319 -467,773 -490,864
Services balance -6,499 -3,679 -14,917 -17,608 -31,911 -31,953 -31,065
Primary income balance 9,056 4,151 3,572 1,459 444 1,837 7,353
Secondary income balance -4,189 -4,985 -4,985 -5,620 -6,116 -6,336 -6,546
Current-account balance 81,148 84,373 105,940 98,677 85,951 86,118 93,207
External debt (US$ m)
Debt stockd 404,585 407,001 376,642 358,161 375,357 367,974 359,748
Debt service paidd 15,166b 19,139b 42,419b 38,498b 35,971 39,328 42,789
Principal repaymentsd 9,108b 11,589b 35,256b 30,281b 25,859 27,533 28,372
Interestd 6,058b 7,550b 7,163b 8,217b 10,112 11,795 14,417
International reserves (US$ m)
Total international reserves 346,444 363,580 367,944 371,103 384,791 385,273 385,947
a
Actual. b
Economist Intelligence Unit estimates. c
Economist Intelligence Unit forecasts. d
On a balance-ofpayments
basis; includes both foreign- and local-currency-denominated debt held by non-residents.
Source: IMF, International Financial Statistics.
South Korea
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Quarterly data
2016 2017
1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr
General government finance (W bn)
Revenue 96,106 95,113 95,150 84,895106,216103,314100,264 n/a
Expenditure 110,233 89,049 78,901 76,171110,134101,558 85,446 n/a
Balance -14,127 6,064 16,249 8,724 -3,918 1,756 14,818 n/a
Output (seasonally adjusted)
GDP at constant 2010 prices (W bn) 373,161376,536378,324380,245384,285386,583 n/a n/a
GDP at constant 2010 prices (% change,
year on year) 2.9 3.4 2.6 2.4 3.0 2.7 n/a n/a
Industrial production index (2010=100) 107.6 109.1 109.2 109.9 111.7 109.1 110.8 n/a
Industrial production (% change, year on
year) -0.3 1.6 -0.1 1.6 3.9 0.0 1.4 n/a
Employment, wages and prices
Employment (‘000) 25,554 26,387 26,554 26,446 25,915 26,754 26,833 26,707
Employment (% change, year on year) 1.1 1.1 1.2 1.2 1.4 1.4 1.1 1.0
Unemployment rate (% of labour force) 4.3 3.7 3.6 3.2 4.3 3.9 3.5 3.2
Average monthly wages, all industry (W
m) 3,535 3,221 3,465 3,481 3,625 3,332 3,575 n/a
Average monthly wages, all industry (%
change, year on year) 5.3 3.0 3.5 3.4 2.5 3.5 3.2 n/a
Consumer prices (2015=100) 100.5 100.7 100.9 101.8 102.5 102.7 103.2 103.3
Consumer prices (% change, year on
year) 0.9 0.8 0.7 1.4 2.1 1.9 2.3 1.5
Producer prices (2010=100) 98.6 98.6 98.9 100.3 102.7 101.9 n/a n/a
Producer prices (% change, year on
year) -3.3 -2.9 -1.8 0.8 4.2 3.3 n/a n/a
Financial indicators
Exchange rate W:US$ (av) 1,202 1,163 1,121 1,156 1,155 1,129 1,132 1,107
Exchange rate W:US$ (end-period) 1,154 1,165 1,096 1,209 1,116 1,140 1,147 1,071
Deposit rate (av; %) 1.7 1.6 1.4 1.6 1.6 1.6 n/a n/a
Lending rate (av; %) 3.5 3.4 3.2 3.3 3.5 3.4 1.2 n/a
3-month money market rate (av; %) 1.5 1.4 1.2 1.2 1.2 1.2 n/a n/a
Money supply, M1 (end-period; W trn) 723 744 749 796 794 816 837 n/a
Money supply, M1 (% change, year on
year) 19.6 14.7 10.2 12.3 9.8 9.8 11.7 n/a
Money supply, M2 (end-period; W bn) 2,296 2,338 2,380 2,407 2,438 2,464 2,510 n/a
Money supply, M2 (% change, year on
year) 7.9 6.7 7.2 7.1 6.2 5.4 5.5 n/a
KOSPI Composite stockmarket index
(end-period; Jan 4th 1980=100) 1,996 1,970 2,044 2,026 2,160 2,392 2,394 2,467
KOSPI Composite stockmarket index (%
change, year on year) -10.5 -10.4 8.6 3.4 12.7 25.0 16.0 27.1
Foreign trade (US$ m)
Exports fob 115,187126,024121,853132,361132,072147,047151,074143,672
Imports cif -93,830 -99,304 –
102,464

110,595

116,352

117,878

120,766

123,098
Trade balance 21,358 26,720 19,389 21,766 15,720 29,169 30,308 20,574
Foreign payments (US$ m)
Merchandise trade balance 30,209 33,175 28,184 27,328 27,307 29,561 34,750 n/a
Services balance -3,659 -4,205 -5,549 -4,325 -8,663 -6,749 -8,498 n/a
Primary income balance 1,382 -717 2,325 863 1,375 -4,877 1,947 n/a
Net transfer payments -971 -1,213 -2,395 -1,188 -816 -1,484 -2,630 n/a
Current-account balance 26,961 27,040 22,564 22,678 19,203 16,452 25,570 n/a
Reserves excl gold (end-period) 365,045365,095372,976366,307370,507375,773379,879384,472
Sources: Bank of Korea; IMF, International Financial Statistics.
Monthly data
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Exchange rate W:US$ (av)
South Korea
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2015 1,089 1,098 1,113 1,089 1,091 1,112 1,143 1,179 1,185 1,148 1,152 1,172
2016 1,202 1,217 1,188 1,148 1,172 1,171 1,144 1,112 1,107 1,125 1,162 1,182
2017 1,185 1,145 1,135 1,133 1,125 1,130 1,134 1,131 1,132 1,132 1,105 1,086
Exchange rate W:US$ (end-period)
2015 1,091 1,099 1,105 1,068 1,108 1,124 1,166 1,176 1,195 1,142 1,150 1,172
2016 1,208 1,235 1,154 1,144 1,191 1,165 1,126 1,119 1,096 1,145 1,169 1,209
2017 1,158 1,132 1,116 1,130 1,124 1,140 1,119 1,123 1,147 1,125 1,082 1,071
General government revenue (W bn)
2015 34,393 16,196 30,532 40,243 24,205 23,561 37,602 23,858 25,059 35,219 23,450 24,868
2016 38,038 23,572 34,496 45,060 26,333 23,720 39,065 29,024 27,061 36,014 22,893 25,988
2017 45,058 23,842 37,316 48,047 30,471 24,796 41,950 30,305 28,009 40,903 n/a n/a
General government expenditure (W bn)
2015 28,564 31,131 37,633 33,065 24,841 37,791 22,790 24,670 33,652 18,207 17,859 29,148
2016 28,685 35,047 46,501 26,713 26,100 36,236 22,950 21,319 34,632 26,946 19,137 30,088
2017 30,207 34,685 45,242 35,058 28,250 38,250 23,698 29,013 32,735 26,334 n/a n/a
General government balance (W bn)
2015 5,829 -14,935 -7,101 7,178 -636 -14,230 14,812 -812 -8,593 17,012 5,591 -4,280
2016 9,353 -11,475 -12,005 18,347 233 -12,516 16,115 7,705 -7,571 9,068 3,756 -4,100
2017 14,851 -10,843 -7,926 12,989 2,221 -13,454 18,252 1,292 -4,726 14,569 n/a n/a
Money supply, M1 (% change, year on year)
2015 11.5 15.9 16.4 18.5 18.4 20.0 21.2 20.4 23.4 22.0 19.3 20.9
2016 20.5 18.2 19.6 17.1 15.2 14.7 14.1 14.0 10.2 11.9 12.6 12.3
2017 11.9 10.3 9.8 10.7 9.5 9.8 8.4 7.2 11.7 7.9 7.0 n/a
Money supply, M2 (% change, year on year)
2015 7.7 8.2 8.5 9.4 9.1 9.6 8.9 8.9 9.0 8.3 7.0 8.2
2016 8.4 7.8 7.9 6.9 6.5 6.7 7.6 7.3 7.2 6.8 7.4 7.1
2017 5.7 6.2 6.2 6.6 5.7 5.4 4.5 4.3 5.5 4.6 4.9 n/a
Industrial production (seasonally adjusted; % change, year on year)
2015 -3.3 -0.2 -1.3 -1.7 -1.1 -1.3 -3.0 2.1 3.1 2.7 0.3 -1.8
2016 -0.7 0.4 -0.6 -0.8 4.5 1.1 3.0 -1.5 -1.6 -1.3 3.7 2.5
2017 7.3 1.0 3.4 1.9 -1.3 -0.5 -0.1 2.4 2.0 1.4 -1.4 n/a
Unemployment rate (%)
2015 3.8 4.6 4.0 3.9 3.8 3.9 3.7 3.4 3.2 3.1 3.1 3.2
2016 3.7 4.9 4.3 3.9 3.7 3.6 3.5 3.6 3.6 3.4 3.1 3.2
2017 3.8 5.0 4.2 4.2 3.6 3.8 3.5 3.6 3.4 3.2 3.2 3.3
Deposit rate (av; %)
2015 2.2 2.1 2.0 1.8 1.8 1.7 1.6 1.6 1.6 1.6 1.7 1.8
2016 1.7 1.7 1.6 1.6 1.6 1.5 1.4 1.4 1.4 1.5 1.6 1.7
2017 1.6 1.6 1.6 1.6 1.6 1.6 1.6 1.6 n/a n/a n/a n/a
Lending rate (av; %)
2015 3.9 3.9 3.6 3.4 3.6 3.5 3.4 3.4 3.4 3.4 3.4 3.5
2016 3.5 3.5 3.5 3.4 3.5 3.3 3.2 3.2 3.3 3.3 3.3 3.4
2017 3.5 3.5 3.5 3.4 3.5 3.4 3.5 3.4 n/a n/a n/a n/a
KOSPI Composite stockmarket index (end-period; Jan 4th 1980=100)
2015 1,949 1,986 2,041 2,127 2,115 2,074 2,030 1,941 1,963 2,029 1,992 1,961
2016 1,912 1,917 1,996 1,994 1,983 1,970 2,016 2,035 2,044 2,008 1,983 2,026
2017 2,068 2,092 2,160 2,205 2,347 2,392 2,403 2,363 2,394 2,523 2,476 2,467
Consumer prices (av; % change, year on year)
2015 1.0 0.7 0.5 0.4 0.5 0.7 0.7 0.7 0.5 0.8 0.8 1.1
2016 0.6 1.1 0.8 1.0 0.8 0.7 0.4 0.5 1.4 1.5 1.5 1.3
2017 2.0 1.9 2.2 1.9 2.0 1.9 2.3 2.6 2.1 1.8 1.3 1.5
Producer prices (av; % change, year on year)
2015 -3.3 -3.8 -3.6 -3.5 -3.5 -3.7 -4.1 -4.6 -4.5 -4.6 -4.7 -4.0
2016 -3.3 -3.3 -3.2 -3.0 -3.0 -2.7 -2.5 -1.8 -1.1 -0.1 0.7 1.8
2017 4.1 4.1 4.3 3.8 3.4 2.8 3.0 3.4 3.8 3.7 3.0 n/a
Goods exports fob (US$ m)
2015 45,105 41,472 46,823 46,222 42,327 46,555 45,696 39,107 43,432 43,352 44,285 42,380
2016 36,260 35,925 43,002 41,082 39,734 45,209 40,882 40,125 40,846 41,983 45,309 45,069
2017 40,263 43,169 48,640 50,847 44,925 51,274 48,834 47,112 55,128 44,986 49,619 49,068
Goods imports cif (US$ m)
2015 39,283 33,998 38,486 37,859 36,040 36,598 38,647 34,772 34,541 36,763 34,050 35,462
2016 31,322 29,163 33,344 32,389 33,025 33,890 33,372 35,104 33,988 35,050 37,241 38,304
2017 37,605 36,179 42,567 37,982 39,322 40,573 38,582 40,506 41,678 37,828 41,986 43,285
Trade balance fob-cif (US$ m)
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2015 5,822 7,474 8,337 8,363 6,288 9,956 7,049 4,335 8,892 6,589 10,235 6,918
2016 4,939 6,761 9,658 8,693 6,708 11,319 7,510 5,021 6,858 6,933 8,068 6,765
2017 2,658 6,990 6,073 12,865 5,603 10,701 10,252 6,606 13,450 7,158 7,633 5,783
Foreign-exchange reserves excl gold (US$ m)
2015 357,392 357,575 357,956 365,107 366,711 369,955 366,028 363,143 363,319 364,806 363,669 363,167
2016 362,499 360,963 365,045 367,687 366,102 365,095 366,589 370,665 372,976 370,372 367,191 366,307
2017 369,242 369,114 370,507 371,779 373,661 375,773 378,961 380,044 379,879 379,668 382,456 384,472
Sources: IMF, International Financial Statistics; Haver Analytics.
Annual trends charts
South Korea
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Quarterly trends charts
South Korea
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Monthly trends charts
South Korea
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Comparative economic indicators
Basic data
Land area
99,678 sq km
Population
50.5m (2016; UN)
Main towns
South Korea
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Population in ’000 (2015; UN)
Seoul (capital): 9,860
Busan: 3,400
Incheon: 2,886
Daegu: 2,455
Daejeon: 1,536
Gwangju: 1,516
Climate
Continental, with extremes of temperature
Weather in Seoul (altitude 87 metres): Hottest month, August, 26.5°C; coldest month, January,
minus 0.4°C; driest month, January, 10.8 mm average rainfall; wettest month, July, 274.1 mm
average rainfall
Language
Korean
Measures
Metric system. Some local measures are:
1 pyong = 3.3058 sq metre
1 chungbo = 0.992 ha
1 suk = 100 dai = 180.39 litres
1 kwan = 1,000 don = 3.75 kg
Currency
Won (W). Average exchange rate in 2017: W1,131:US$1
Time
9 hours ahead of GMT
Public holidays
January 1st (New Year’s Day); February 15th­18th (Lunar New Year); March 1st (Independence
Movement Day); May 7th (Children’s Day); May 22nd (Buddha’s birthday); June 6th (Memorial
Day); June 13th (Local Election Day); August 15th (Liberation Day); September 23rd-25th
(Chuseok holidays); October 3rd (National Foundation Day); October 9th (Hangeul Day);
December 25th (Christmas Day)
South Korea
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Political structure
Official name
Republic of Korea
Form of state
South Korea
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Presidential system; the president and the National Assembly (parliament) are directly elected;
members of parliament are elected using a mixed system of first past the post and proportional
representation
The executive
The president (elected for a single term of five years) appoints the State Council (the cabinet),
which comprises the president, the prime minister and 15-30 ministers. Cabinet ministers are not
normally members of the National Assembly
Head of state
Elected president
Legislature
Unicameral Kuk Hoe (National Assembly) elected for a four-year term. The current assembly,
which was elected in April 2016, has 300 seats. Most of the assembly’s seats are filled by election
from geographical constituencies, with the remainder distributed among the various parties in
proportion to their shares of the national vote
National elections
The next parliamentary poll will be held in April 2020. The last parliamentary and presidential
elections were held in April 2016 and May 2017 respectively
National government
The government is led by the president, Moon Jae-in, who was elected in May 2017 for a single
five-year term. He succeeded Park Geun-hye, who was impeached in March 2017 following a
corruption scandal. The former president is currently awaiting trial in jail on related bribery
charges
Main political organisations
Minjoo Party of Korea (formerly known as the New Politics Alliance for Democracy), Liberty
Korea Party (formerly the Saenuri Party), People’s Party, Bareun Party, Justice Party
Main members of the State Council
President: Moon Jae-in
Prime minister: Lee Nak-yon
Deputy prime minister: Kim Dong-yeon
Key ministers
Defence: Song Young-moo
Employment & labour: Cho Dae-yop
Environment: Kim Eun-kyung
Foreign affairs: Kang Kyung-wha
Health & welfare: Moon Hyung-pyo
Interior: Kim Boo-kyum
Justice: Ahn Kyong-whan
Land, infrastructure & transport: Kim Hyun-mee
Strategy & finance: Kim Dong-yeon
Trade, industry & energy: Kim Hyung-chong
Unification: Hong Yong-pyo
South Korea
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Central bank governor
Lee Ju-yeol
South Korea
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Recent analysis
Generated on February 7th 2018
The following articles have been written in response to events occurring since our most recent forecast was
released, and indicate how we expect these events to affect our next forecast.
Politics
Forecast updates
South Korea turns to WTO over new US tariffs
January 24, 2018: International relations
Event
On January 23rd Kim Hyun-chong, the trade minister, said that South Korea would file a complaint
with the World Trade Organisation (WTO) over the US’s imposition of import tariffs on foreign
washing machines.
Analysis
South Korea’s response to the tariffs expands the front of trade tensions with the US. Earlier in
January South Korea asked the WTO for authorisation to impose annual sanctions, worth at least
US$711m, on the US, as the latter had failed to comply with past WTO dispute settlement
decisions in favour of South Korea over its washing machine exports. The two countries were also
involved in a separate trade dispute at the WTO over steel pipes used in oil drilling.
South Korea’s two largest electronics exporters, Samsung Electronics and LG Electronics—which
were cited in the complaint of their US rival, Whirlpool, to the US International Trade Commission
that led to the new tariffs—export about 2.5m washing machines worth a total of US$1bn to the
US annually. The new US tariffs will add a 20% import duty on the first 1.2m units and 50% on all
subsequent imports in the first year of implementation.
This aggressive trade move by the US takes place amid ongoing bilateral negotiations to revise
the 2012 free-trade agreement (FTA). The US administration’s hard line comes as a slap in the face
for South Korean officials, which have been working to assuage attacks by the US president,
Donald Trump, against the deal since he came to power in January 2017. As a result of these
efforts to rebalance bilateral trade, South Korea’s merchandise surplus with the US was cut by
22.7% in 2017 compared with 2016. Last year both Samsung and LG also announced plans to build
plants in the US to produce washing machines there.
In terms of the impact on the ongoing FTA renegotiations, we have long expected that some
concessions would be extracted by the US. However, Mr Trump’s willingness to adopt aggressive
trade measures against South Korea is concerning with regard to the security situation with North
Korea. Escalating trade tensions at a time when South Korea is engaged in diplomatic outreach
with the North appears counterproductive at best.
Impact on the forecast
This development weakens the prospect for a relatively smooth renegotiation of the FTA.
However, at present we do not expect the trade tensions to affect the strong security relationship
between the two countries, which are allied against the North Korean nuclear threat.
South Korea
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Economy
Forecast updates
BOK leaves policy setting unchanged in January
January 23, 2018: Monetary policy outlook
Event
Following a regular meeting on January 18th, the Bank of Korea (BOK, South Korea’s central
bank) left its main policy interest rate, the base rate, unchanged at 1.5%.
Analysis
As The Economist Intelligence Unit had expected, the BOK kept its policy rate on hold after
raising it in November 2017, from a record low of 1.25%. This is in line with the “forward guidance”
given by the governor of the BOK, Lee Ju-yeol, who hinted in November at another rate increase
by mid-2018. In our previous forecasting round, we were less bullish on the BOK’s ability to
continue with even modest monetary policy tightening owing to our view of a sharp economic
slowdown in China this year. China is South Korea’s largest trade partner and, therefore, the
impact of this slowdown on South Korea’s export-driven economy would have resulted in a
renewed accommodative monetary policy stance by the BOK. However, we have recently revised
up our 2018 real GDP growth forecast for China significantly, from 5.8% to 6.4%, as it has become
apparent that the Chinese government will not prioritise its deleveraging programme in the manner
that we had expected.
As a result, we now forecast that the BOK will go ahead with further interest-rate increases as
South Korea’s GDP continues to grow at a steady pace in 2018–19. This will align monetary policy
in South Korea with the tightening cycle in the US, where the Federal Reserve is forecast to raise
its policy rates at a fairly aggressive pace over the same period. However, we continue to expect
that efforts to “normalise” monetary policy in South Korea will be slower. Although rising US
interest rates will put some downward pressure on the local currency, the won, we believe that the
BOK will prioritise domestic economic conditions and local financial stability. This point was
reinforced by Lee Ju-yeol in his accompanying statement on January 18th. The pace of
normalisation will also be moderated by low inflationary pressure. We share the BOK’s consumer
price inflation forecast of 1.8% a year on average in 2018–19.
Impact on the forecast
Owing to the upward revision to our growth forecast for China in 2018, we now expect the BOK to
proceed with a fresh interest-rate increase by mid-year, taking the rate to 1.75%.
South Korea
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Country Report January 2018 www.eiu.com © Economist Intelligence Unit Limited 2018
Strong export growth continues in January
February 2, 2018: External sector
Event
On February 1st the Ministry of Trade, Industry and Energy reported a 22.2% year-on-year
increase in merchandise exports in January, the fastest pace of growth for that month since 2011.
Analysis
Export growth in January was the third-highest rate since November 2016, when the current streak
of monthly gains began. Extending the 15.8% surge in exports recorded in 2017 as whole, the
strong data for January suggest that the current recovery in global economic growth will continue
to support worldwide demand for South Korean goods. Growth was broad-based across South
Korea’s main export portfolio, with semiconductors and petrochemicals extending their upward
trend to 16 months.
Growth in petrochemical exports, measured in value terms, is buoyed by rising global oil prices.
We expect this trend to continue in 2018. The steady 53.4% year-on-year expansion for
semiconductor exports in January was better than we had anticipated. The cyclical demand for
this type of product is, however, still at risk of moderating as it relies largely on the success of
new product releases, such as smartphones. On the import side, merchandise inbound
shipments, most of which feed into export industries, totalled US$45.5bn in January, up by 20.9%
year on year. The resulting trade surplus amounted to US$3.7bn, extending South Korea’s trade
surplus streak to 72 months.
China’s role in sustaining South Korea’s export growth as the country’s largest export market will
remain vital amid the government’s efforts to “normalise” bilateral ties, which have been strained
over South Korea’s delicate geopolitical positioning between the US and China. In January South
Korean shipments to China increased by 24.5% year on year, the biggest monthly rise in the
current export growth cycle. Yet the US is emerging as the biggest risk factor, with protectionist
headwinds strengthening against key South Korean exports to the country’s second-largest
export market. South Korean exports to the US grew by 4.8% year on year in January, while
imports from the US surged by 22.4%. Sales of home appliances, which were recently hit by US
import tariffs, fell by 20.4%, while shipments of cars tumbled by 17.9%. South Korea’s bilateral
trade surplus with the US narrowed by 67%, to US$320m, in January.
Impact on the forecast
We will leave our view of a slight moderation in export performance in 2018 unchanged. However,
should the strong start of the year extend to the following months, we will revise up our forecast.
South Korea
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Country Report January 2018 www.eiu.com © Economist Intelligence Unit Limited 2018
Inflation starts 2018 on a subdued note
February 2, 2018: Inflation
Event
On February 1st Statistics Korea released data showing that the consumer price index (CPI)
increased by 1% year on year in January, the lowest monthly reading since August 2016, when
the CPI rose by 0.5%.
Analysis
Food was the main factor weighing on headline inflation in January due to a high base of
comparison with January 2017. Prices for food and non-alcoholic beverages declined by 0.3% year
on year, compared with a 5.3% surge in the same month of 2017. Prices for perishables such as
vegetable and fisheries goods fell by 2.6%, compared with a 12% jump in January 2017.
Core inflation, which excludes food and energy prices, also came in at a low of 1.2% year on year,
compared with an average of 1.5% in 2017 as a whole. The last time monthly core inflation was this
low was August 2012. Services prices grew by 1.4%, the lowest rise since February 2014. The
government’s 16.4% increase in the national minimum wage, which came into effect in January,
and the impact on the CPI so far looks limited. Price rises in the restaurant and hotel industry
category averaged 2.8% in January, little changed from 2.7% in the previous month.
The low inflation in January supports our view of a deceleration in price growth in 2018 compared
with 2017, as underlying inflationary pressure remains mild. Should inflation weaken at a faster
pace in the coming months, this would complicate the strategy of the Bank of Korea (BOK, South
Korea’s central bank) to normalise monetary policy. The BOK is set to proceed, by mid-2018, with
another interest-rate rise after a 25-basis-point increase in its policy rate, to 1.5%, in
November 2017. However, the scenario of a sharp deceleration in inflation is not our central
forecast. We believe that, although moderate, the pace of inflation will be sustained by rising
global oil prices and steady domestic economic conditions and will allow the BOK to modestly
tighten monetary policy.
Impact on the forecast
The latest inflation data are consistent with our view that the annual increase in the CPI will
decelerate slightly to 1.8% in 2018, from 1.9% in 2017, with underlying inflationary pressure
remaining mild. This will be sufficient to allow the BOK to proceed with a modest interest-rate
increase by mid–2018.
South Korea
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Country Report January 2018 www.eiu.com © Economist Intelligence Unit Limited 2018
Samsung heir walks free
February 6, 2018: Policy trends
Event
On February 5th the Seoul High Court overturned the lower-court ruling against Lee Jae-yong,
vice-chairman of Samsung Electronics and heir to control of the Samsung Group, and set him free
by suspending his reduced jail sentence.
Analysis
In a reversal of the first-trial outcome of five years in prison, the appeals court reduced the
sentence to two years and six months and suspended it for four years. Lee Jae-yong, who had
already served nearly a year in prison, walked free after the court dismissed much of the
corruption evidence brought against him. The special prosecutor investigating Lee Jae-yong’s
alleged dealings with Park Geun-hye, the impeached former president, had indicted him on five
charges including bribery, embezzlement and perjury. The lower court had accepted the
prosecution’s argument that Lee Jae-yong was a willing participant in a collusion scheme with
Park Geun-hye and her long-time confidante, Choi Soon-sil, over his consolidation of management
control of the Samsung Group. However, the second-court ruling portrayed Lee Jae-yong as a
passive victim of a racketeering scheme led by the former president. Nonetheless, legal issues are
not over for the Samsung heir because the prosecution vowed to take the case to the Supreme
Court for a final verdict.
The case against Lee Jae-yong is only the latest addition to the long list of captains of industry
caught up in cosy relationships with politicians. Shin Dong-bin, chairman of the Lotte Group, is
next in line for a lower-court ruling this month on similar, but less serious, charges before Park
Geun-hye’s own turn to face a first-trial verdict. Under previous governments, the nation’s top
businessmen running afoul of the law often got away with suspended jail terms or presidential
pardons.
We do not expect the same pattern of pardons to prevail under the current, liberal administration
given its strong stance on reform of family-controlled business conglomerates known as chaebol.
Although the judiciary’s latest decision has no direct impact on the executive’s policy drive, Lee
Jae-yong’s lighter sentence still appears to be a damper on reform momentum by sending mixed
signals to foreign investors regarding future efforts to level the corporate playing field. It will also
reduce the incentive for the chaebol to reform their management structures, which are centralised
around family dynasties.
Impact on the forecast
The latest development supports our view that the government’s economic reform efforts to rein
in the excesses of the chaebol will translate into only modest progress.
Analysis
Steady GDP growth on track for 2018
January 29, 2018
South Korea’s economy stayed on a gradual recovery path in 2017, expanding by 3.1%,
compared with a growth rate of 2.8% in 2016. This was in line with The Economist
Intelligence’s estimate of 3.2% for the year. Real GDP expansion would have been stronger
were it not for the fact that growth in imports of goods and services outpaced that of exports. In
2018 continued external demand from South Korea’s main trade partners will provide a
supporting environment for growth, but we expect that the rate of economic expansion will
continue to be sustained largely by solid domestic demand.
Although the pace of GDP growth eased to 3% year on year in the fourth quarter, from 3.8% in the
third quarter, 2017 as a whole remains a year of solid economic performance. This is all the more
remarkable as last year was rocked by a series of political and international events, which could
have been highly disruptive for the economy. The impeachment and conviction of the former
South Korea
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Country Report January 2018 www.eiu.com © Economist Intelligence Unit Limited 2018
president, Park Geun-hye, on corruption charges, which also brought down the de facto chairman
of the largest conglomerate and biggest exporter, Samsung, had no lasting impact on the
economy. In addition, the country was under increased military threat from North Korea, which
continued to ramp up its missile and nuclear testing. Nonetheless, this also failed to hurt South
Korea’s economic attractiveness, as reflected by the appreciating trend of the local currency, the
won, against the US dollar in 2017.
Strong domestic demand and investment lifted imports
On a factor-cost basis, real GDP was buoyed in 2017 by the strong recovery in global demand, and
for electronic products in particular. This was illustrated by steady growth in manufacturing,
which rose by 4.2%, the fastest year-on-year rate since 2011. This was also visible on an
expenditure basis, with exports of goods growing by 3.7% for the year as a whole, compared with
2.2% in 2016. However, this performance was outweighed by faster growth in goods imports,
which jumped by 7.3%, resulting in a negative contribution of trade to GDP growth.
The surge in imports is nonetheless related to very positive developments for the South Korean
economy, as it was driven by solid domestic demand growth in 2017. At 2.6% last year, household
consumption maintained a positive growth trend for the third consecutive year. Consumer
sentiment, as measured by a survey conducted by the Bank of Korea (BOK, South Korea’s central
bank) improved throughout the year, with the index reading rising from 93 in January to 111 in
December. Household spending was supported by steady government spending, which grew by
3.7%. This was a slower rate compared with 4.3% in 2016, but is faster than the 2011–15 annual
average of 3%. Investment, a major driver of growth in 2017, also helped to lift imports: gross fixed
capital formation grew by a record high of 8.8%, the fastest rate of expansion in 18 years. Both of
its components, investment in construction and facilities, showed high rates of growth.
Fiscal policy will support consumption in 2018
Going forward, we expect the domestic drivers of growth to remain on track. Although the BOK is
set to raise its main policy interest rate, the base rate, from 1.5% to 1.75% by mid-2018, we do not
expect the modest efforts of the central bank to “normalise” its monetary policy to derail the
growth momentum. Enabled by moderate inflationary pressure, we believe that the BOK will
prioritise domestic economic conditions and is unlikely to hinder the government’s fiscal stimulus
efforts.
Consumption will continue to be supported by an expansionary fiscal policy. In the 2018 budget
adopted in early December, spending allocated to healthcare, welfare and jobs was up by 11.7%
from 2017, to W144.7trn (US$127bn), or 33% of the total outlay. The redistributive policy drive of
the liberal president, Moon Jae-in, is set to benefit household spending. The latter is likely to be
fuelled by measures such as the 16.4% increase in the hourly minimum wage, and by the rise in
public-sector employment. Investment growth, after the strong rebound in 2017, is likely to
decelerate in 2018 but will continue to make a positive contribution to GDP growth.
A dampening factor for construction activity will come from the 14.2% year-on-year cut in
infrastructure spending in the 2018 budget. Facilities investment may also be impeded by the
corporate income tax law amendment linked to the 2018 budget, which raised the tax rate on the
portion of corporate taxable income that exceeds W300bn (US$260m) to 25%, from 22%
previously. However, good external trade prospects will, overall, provide continued incentives for
investment growth.
Trade prospects in 2018
Our view on trade prospects for 2018 is broadly positive: in addition to a sanguine outlook for
demand from two of South Korea’s largest export markets, the US and the EU, we have recently
revised up our 2018 real GDP growth forecast for China, its largest trade partner, from 5.8% to
6.4%. As it has become apparent that the Chinese government will not prioritise its deleveraging
programme in the manner that we had anticipated, we now do not expect a sharp slowdown in
economic activity in that country this year. However, we still believe that the peak of the rebound
in global demand has passed, and this view was supported by the deceleration in South
Korea’s export growth recorded in the last quarter of 2017. As a result, we will lift our growth
forecasts for South Korea’s exports of goods and services and imports for 2018, from 1.2% and 2%
South Korea
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Country Report January 2018 www.eiu.com © Economist Intelligence Unit Limited 2018
respectively, but they will remain slightly below last year’s growth rates.
In the light of good trade prospects, supported by our steady economic outlook for China, the US
and the EU, and supportive fiscal policy in South Korea, we will revise up our current real GDP
growth forecast for 2018 of 2.5%. We do not expect the BOK’s progressive monetary policy
tightening to derail the growth momentum. Should the latter show signs of weakening, with
external demand performing worse than we anticipate, we believe that the BOK would revert to an
accommodative stance. In this context, the BOK’s projected real GDP growth rate of 3% in 2018
appears achievable. South Korea
27
Country Report January 2018 www.eiu.com © Economist Intelligence Unit Limited 2018

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What is the current economic situation in South Korea?

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What is the current economic situation in South Korea? Is the country growing? Are interest rates and inflation high? How was the country impacted by the global financial crisis? Has the country recently had any other financial crises? Is it a good time to export to or import from South Korea?
You need to address the question and you can use data from the document attached. Please provide your argument based on sources and data._________________________________________________________________________________________________________________________________________________________
Country Report
South Korea
Generated on February 7th 2018
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South Korea
Summary
Briefing sheet
Outlook for 2018-22
Political stability
Election watch
International relations
Policy trends
Fiscal policy
Monetary policy
International assumptions
Economic growth
Inflation
Exchange rates
External sector
Forecast summary
Quarterly forecasts
Data and charts
Annual data and forecast
Quarterly data
Monthly data
Annual trends charts
Quarterly trends charts
Monthly trends charts
Comparative economic indicators
Summary
Basic data
Political structure
Recent analysis
Politics
Forecast updates
Economy
Forecast updates
Analysis 24556667788889
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South Korea
1
Country Report January 2018 www.eiu.com © Economist Intelligence Unit Limited 2018
Briefing sheet
Editor: Agathe L’Homme
Forecast Closing Date: January 15, 2018
Political and economic outlook
The president, Moon Jae-in, will serve out a full five-year term in
office. The ruling Minjoo Party’s shallow majority in the National
Assembly (parliament) means that policymaking will continue to rely
on cross-bench support until the parliamentary elections in 2020.
Moon Jae-in’s re-engagement efforts with North Korea will provide deescalation
channels, but the North will continue its nuclear
programme. The Economist Intelligence Unit therefore expect the USSouth
Korea security relationship to remain strong.
The current administration will pursue an ambitious demand-driven
economic growth agenda through increased government spending
and redistributive policies. However, we expect the dominance of the
chaebol (family-run conglomerates) to continue over 2018-22.
We expect real GDP growth to average a subdued 2.7% a year in 2018-
22. This reflects our expectation of marked slowdowns in the US and
China over the next five years. Both are major markets for South
Korean goods, and so this will hit local export growth.
Consumer price inflation is forecast to remain modest in 2018-22, at an
annual average of 1.8%, as global oil prices remain relatively low.
The current account will remain in surplus during the forecast period,
at the equivalent of 5.8% of GDP on average. The trade surplus will
continue to offset deficits on the services and secondary income
accounts.
South Korea
2
Country Report January 2018 www.eiu.com © Economist Intelligence Unit Limited 2018
Key indicators
2017a 2018b 2019b 2020b 2021b 2022b
Real GDP growth (%) 3.2c 2.5 2.6 2.4 2.9 3.2
Consumer price inflation (av; %) 1.9 1.8 1.7 1.4 1.9 2.1
Government balance (% of GDP) 0.9c -0.3 -0.1 -0.5 0.1 0.2
Current-account balance (% of GDP) 5.6c 5.4 5.7 5.5 6.3 6.0
Money market rate (av; %) 1.3 1.9 2.1 1.4 1.5 1.8
Unemployment rate (%) 3.7 3.8 3.7 3.8 3.7 3.6
Exchange rate W:US$ (av) 1,131 1,140 1,163 1,175 1,150 1,144
a
Actual. b
Economist Intelligence Unit forecasts. c
Economist Intelligence Unit estimates.
Key changes since December 12th
Based on the latest available data, we have revised up slightly our fiscal balance estimate for
2017: while spending kept a steady pace, tax revenue increased at an even faster rate owing to
strong GDP growth. Our forecasts for 2018-22 are unchanged.
In the light of the won’s steep appreciation in late 2017, we have revised our exchange-rate
forecast for 2018 and factored in a smaller depreciation. We now expect the won to weaken
from an average of W1,131:US$1 in 2017 to W1,140:US$1 in 2018.
The month ahead
January 24th—Preliminary GDP (Q4 2017): In line with the strong year-on-year growth rates
recorded in the first three quarters of 2017, we expect a solid expansion in the final quarter. We
estimate that the economy expanded by 3.2% in 2017 as a whole.
January 31st—Consumer price index (January): We expect relatively low inflationary
pressure to persist in the coming months, with consumer price inflation trending below the 2%
target of the Bank of Korea (South Korea’s central bank).
February 1st—Trade data (January): After a record trade performance in 2017, we still expect a
deceleration in export growth in 2018. We forecast that cyclical demand for key South Korean
products, including semiconductors, will moderate progressively.
Major risks to our forecast
Scenarios, Q4 2017 Probability Impact Intensity
South Korea
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Country Report January 2018 www.eiu.com © Economist Intelligence Unit Limited 2018
Outlook for 2018-22
Political stability
The Economist Intelligence Unit expects the president, Moon Jae-in of the Minjoo Party (the
liberal-leaning ruling party), to serve out his constitutionally mandated five-year term. The
implementation of Moon Jae-in’s ambitious social and economic policy agenda is making steady
progress despite the difficult parliamentary dynamic. With 121 out of 300 seats in the National
Assembly (parliament), Minjoo lacks the three-fifths majority required to pass legislation
unilaterally. However, the administration can rely on the president’s continued popularity—his
approval rate hovered above 70% in December 2017—to negotiate cross­bench support. The main
opposition party, the conservative Liberty Korea Party (LKP, formerly known as the Saenuri
Party), intends to act as an obstructionist force in parliament given its 116 seats, but has so far
managed only to delay the legislative agenda marginally. This was illustrated by the adoption of
the 2018 budget in December 2017: although delayed slightly, the law included major reforms on
taxes, wages and labour, which are at the core of Moon Jae-in’s redistributive policy orientation.
Minjoo’s popularity has also resulted in dwindling public support for centrist parties. This led the
centre-left People’s Party (PP) and the centre-right Bareun Party to agree to merge in early January
2018. By joining forces, Bareun and the PP hope to remobilise the moderate vote and offer a
credible alternative to the two main parties, Minjoo and the LKP, ahead of the local elections
scheduled for June 2018. The likelihood that the new entity will be steamrolled by Minjoo is high,
however. In any case, the new centrist party will suffer from the same woes as the PP: it will
struggle to establish itself as either a solid ally of Minjoo or as a major opposition force ahead of
the next legislative election in April 2020.
The situation in North Korea traditionally divides hawkish conservatives and dovish liberals, but
we do not expect the ongoing tensions around the North’s rapid progress towards full
nuclearisation to have a destabilising effect on South Korea’s domestic politics. Moon Jae-in is
starting to reap some successes on his policy of engagement with the North. The latter’s
agreement to participate in the Pyeongchang Winter Olympics, which will be held in South Korea
in February 2018, is a major political win for the South Korean president. Meanwhile, Moon Jaein’s
commitment to deepening security ties with the US leaves little room for the conservative
opposition to paint the liberal president as weak on the foreign policy front.
Moon Jae-in will, however, be judged by his liberal political support base mainly on his success in
delivering his socio-economic pledges. Should progress on these stall, it would pose risks to
Moon Jae-in’s popularity and, therefore, to his party’s negotiation power. This would have a
significant negative impact on the efficiency of policymaking. Nonetheless, we expect that
political stability will continue to be supported by the country’s efficient bureaucracy.
The central bank embarks on an aggressive tightening of monetary policy Moderate High 12
The rising number of splintered political parties halts policymaking Moderate High 12
Despite ambitious plans to expand the highway system, severe traffic
congestion causes delays High Moderate 12
Stimulus efforts imperil the government’s fiscal position and lead to higher
taxes High Moderate 12
Slumping profitability forces South Korean banks to reduce lending Moderate High 12
Note: Scenarios and scores are taken from our Risk Briefing product. Risk scenarios are potential
developments that might substantially change the business operating environment over the coming two
years. Risk intensity is a product of probability and impact, on a 25-point scale.
Source: The Economist Intelligence Unit.
South Korea
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Country Report January 2018 www.eiu.com © Economist Intelligence Unit Limited 2018
Election watch
The next nationwide ballot is the legislative election due in April 2020. The last such poll took
place in April 2016, and the president does not have the power to dissolve parliament and call
early elections. The ruling party will campaign on the unique opportunity for voters to improve its
legislative position and reduce the obstructionist power of the opposition. A first test will be the
upcoming local elections, due in June 2018, when we expect Minjoo to perform well. According to
a poll in late December by the JoongAng Ilbo newspaper, the ruling party is set to win all five key
races (mayoral contests in the capital, Seoul, Incheon and Busan, and gubernatorial elections in
the provinces of Gyeonggi and South Gyeongsang). We believe that the polarisation of politics
will continue in the next two years, owing to heated debates over the government’s redistributive
policies and North Korea strategy, which have traditionally split conservatives and liberals. With
the centrist parties already showing signs of fading, we consequently expect Minjoo’s electoral
strategy in 2020 to focus on attracting liberal voters drifting from the political centre. This will be a
tall order. However, if South Korea follows a better economic growth track than we currently
forecast over 2018-20, this may buoy Minjoo’s popularity and lift its representation in parliament.
International relations
The North Korean issue will continue to dominate Moon Jae-in’s term in office. Despite the
positive developments in early January, with high-level talks held between North and South
Korea, we expect the Northern regime’s aggressive pursuit of its nuclear and missile programmes
to remain a significant security risk to South Korea. Owing to fundamental differences on the
nuclear issue, further rapprochement, such as a meeting between the leaders of the two countries
—Kim Jong­un in the North and Moon Jae­in in the South—is unlikely.
Nevertheless, modestly improved bilateral ties will ease the risk of a major military confrontation
as the international community, led by the US, maintains its pressure on North Korea to end its
nuclear programme. South Korea has deeply entrenched security ties with the US, which we
expect Moon Jae-in to maintain. A more arduous task for the president will be to influence the
North Korean strategy of his US counterpart, Donald Trump, and to maintain peace on the
peninsula. The US’s agreement to postpone an annual joint military exercise until after the
Pyeongchang Winter Olympics offers a rare window of opportunity for Moon Jae-in’s
engagement efforts. However, we believe that the South Korean president will still struggle to get
a greater say in the US’s policy towards North Korea.
Ties with China are recovering from the strain of intense Chinese opposition to the deployment of
the US-built Terminal High-Altitude Area Defence (THAAD) anti-missile system. We expect that
the agreement in October 2017 between the two countries to “normalise” their relationship will
lead to the progressive easing of China’s economic retaliatory measures against South Korea.
However, these have done lasting damage to the bilateral relationship, and ties are unlikely to
regain their previous level of warmth in 2018-22. Although China has long been an advocate of
inter-Korean talks, its unwillingness to crack down seriously on the North’s progress towards
becoming a nuclear power with intercontinental ballistic missile capabilities will continue to make
it an unreliable security partner for South Korea in the near future.
Despite the North Korean threat and the need to explore closer security co operation between the
two main US allies in the region, South Korea’s relations with Japan will remain prone to spats.
Negative perceptions of the former colonial power will continue to linger among the South Korean
public. The most visible source of historical tensions will remain the issue of South Korean
“comfort women” (who were forced to act as sex slaves for the Japanese military during the
second world war). A broad and lasting improvement in bilateral relations is unlikely, but such
tensions will not affect economic ties.
South Korea
5
Country Report January 2018 www.eiu.com © Economist Intelligence Unit Limited 2018
Policy trends
In a significant departure from the supply-side-oriented policies pursued by South Korea’s most
recent conservative administrations, Moon Jae-in intends to implement an ambitious demanddriven
economic policy, with emphasis on a “people-centred economy” and “income-led growth”.
The liberal government aims to address rising concerns about income inequality and job security
—the most pressing issues for young people, whose rate of unemployment has been rising over
the past few years. Recent economic policies—such as measures to alleviate debt pressure on
households, raise taxes on corporate entities and the wealthiest and increase the minimum wage—
aim to redistribute wealth and level the playing field between small and corporate players. Fiscal
policy has focused on job creation (mainly in the public sector) and extending welfare benefits.
Moon Jae-in appears less concerned than his predecessor, Park Geun-hye, about the need to
diversify the economy away from exports and into high-value services, such as artificial
intelligence. This should help to ensure industrial policy continuity. Given this background, the
chaebol (powerful family-owned conglomerates) are likely to remain at the forefront of South
Korea’s export-oriented economy, despite the high-profile corruption case against Park Geun-hye
and the conviction of the vice-chairman and de facto leader of the Samsung Group, Lee Jae-yong.
Modest progress on the issue of corporate governance reform will still be achieved under the
current administration, mainly through amendments to the Monopoly Regulation and Fair Trade
Act that strengthen the regulatory framework around the chaebol and its enforcement.
Fiscal policy
We expect the administration to maintain the loose fiscal policy stance adopted by the previous
government in order to boost economic growth. The new administration raised the 2018 budget by
7.1%, to W429trn (US$376bn), in the largest budget increase since 2009, when the country was
dealing with the aftermath of the global financial crisis. Around 33% of total spending will be
allocated to health, welfare and labour. This represents a 12% rise compared with the 2017 budget.
Defence is the next highest priority with a 7% increase in spending, and officials expect to finance
these changes by slashing expenditure on social overhead capital, such as maintenance of public
infrastructure.
The government expects to continue expanding its budget in the next five years, targeting an
average annual increase of 5.8%. However, this plan is based on an overoptimistic growth
outlook, with the government expecting tax collection to increase by 11% in 2018. We forecast
that this rosy outlook will be derailed by a marked slowdown in China’s economy in 2018 and in
the US in 2020. Based on consolidated expenditure and revenue numbers (which include social
security funds such as pensions), we forecast that the budget balance will slip into the red in
2018, and the government will post small deficits in 2018-20. A modest economic recovery from
2021 onwards will help to return the budget to a slight surplus by the end of the forecast period.
Monetary policy
The Bank of Korea (BOK, South Korea’s central bank) raised its policy interest rate, the base rate,
from a record low of 1.25% to 1.5% at its regular policy meeting in November 2017. In line with its
view of a sustainable economic recovery trend, the bank hinted at another rate increase by mid2018.
However, we are less bullish on the BOK’s ability to continue with even modest mone tary
policy tightening owing to our forecast of a policy-induced economic slowdown in China this
year. Monetary policy divergence with the US, where the Federal Reserve (Fed, the US central
bank) will accelerate its tightening cycle, will exert depreciatory pressure on the won, but we
expect the BOK to prioritise supporting the domestic economy in 2018. With economic conditions
picking up in 2019, we believe that the BOK will resume progressive policy rate increases before
putting them on hold again in 2020, as the US records a technical recession early that year and the
Fed aggressively cuts its interest rates. As GDP growth accelerates and inflationary expectations
start to build in 2021 22, the BOK will proceed with new interest­rate rises, resulting in a 150­basispoint
increase by the end of the forecast period compared with end-2017.
South Korea
6
Country Report January 2018 www.eiu.com © Economist Intelligence Unit Limited 2018
International assumptions
2017 2018 2019 2020 2021 2022
Economic growth (%)
US GDP 2.2 2.2 2.3 0.9 1.9 1.8
OECD GDP 2.3 2.1 2.0 1.3 1.9 1.9
World GDP 2.9 2.8 2.8 2.3 2.8 2.7
World trade 4.6 3.5 3.7 2.7 3.7 3.7
Inflation indicators (% unless otherwise indicated)
US CPI 2.1 2.2 2.3 1.3 1.8 1.9
OECD CPI 2.1 2.0 2.0 1.7 1.8 1.9
Manufactures (measured in US$) 3.5 4.2 4.0 2.9 4.0 3.3
Oil (Brent; US$/b) 54.5 59.0 57.5 54.5 58.8 62.0
Non-oil commodities (measured in US$) 7.5 1.6 0.8 -2.3 2.1 1.4
Financial variables
US$ 3-month commercial paper rate (av; %) 1.1 1.7 2.5 2.3 1.5 1.8
¥:US$ (av) 111.8 109.0 106.8 104.0 100.0 100.2
W:US$ (av) 1,131 1,140 1,163 1,175 1,150 1,144
US$:€ (av) 1.13 1.17 1.16 1.20 1.20 1.24
Economic growth
We expect real GDP to grow by an average of 2.7% a year in 2018-22. We forecast that
diversification away from South Korea’s export-led growth model will not be achieved within our
forecast period. This means that the fate of the economy will remain tied to global trade prospects,
as well as the performance of exports in established and new markets. China will remain a source
of both opportunity and distress. We forecast that rising Chinese incomes in 2018-22 will provide
opportunities for consumer-oriented South Korean exporters. However, the threat of economic
pressure, as illustrated by the THAAD dispute in 2017, will encourage exporters to diversify to
other markets. This trend will be strengthened by a slowdown in China’s economy in 2018, which
will further dampen sales targeted at the domestic Chinese market. (South Korean exports of
components for electronics products assembled in China for final sale in developed economies
such as the US and EU will also slow slightly in 2018, as the boost from new product releases seen
in 2017 fades.) In 2020 exports will again be hit by a technical recession in the US, South Korea’s
second-largest market. The export slowdowns that we expect in 2018 and 2020 are the key factors
behind our relatively weak average annual economic growth forecast for South Korea in the next
five years.
The government’s focus on redistributive policies will offer some support for private consumption
growth, which will average 2.2% a year in 2018-22, but the latter will remain constrained by the
burden of debt repayment, compounded by interest-rate increases. Rising youth unemployment
(and underemployment) and labour market distortions are also a cause for concern in the medium
to long term, although the government’s public job-creation agenda will ease the severity of the
problem in the short term. Growth in real government consumption, at 4.1% a year on average in
2018-22, will be faster than in the previous five years (3.6%), but will provide only a slight lift to
overall economic growth.
Economic growth
% 2017a 2018b 2019b 2020b 2021b 2022b
GDP 3.2 2.5 2.6 2.4 2.9 3.2
Private consumption 2.4 2.2 2.4 2.1 2.3 2.2
Government consumption 4.0 4.5 4.0 4.5 3.6 4.0
Gross fixed investment 9.5 2.5 5.0 1.8 3.6 3.8
Exports of goods & services 3.0 1.2 2.1 1.6 3.0 4.3
Imports of goods & services 8.4 2.0 3.3 0.9 3.5 3.8
Domestic demand 5.4 2.9 4.7 2.0 3.2 3.0
Agriculture -0.8 0.5 0.7 0.6 1.2 0.9
Industry 4.8 2.5 3.5 2.0 4.5 3.8
Services 2.3 2.5 2.1 2.7 1.8 2.8
a
Economist Intelligence Unit estimates. b
Economist Intelligence Unit forecasts.
South Korea
7
Country Report January 2018 www.eiu.com © Economist Intelligence Unit Limited 2018
Inflation
Owing to our forecast of a moderate rise in global oil prices in 2018-22, we expect consumer prices
to increase by an annual average of 1.8% over the period. As one of the world’s largest oil
importers, South Korea will remain highly susceptible to unexpected shifts in global energy prices.
Inflation risks would also skew to the upside if the won were to depreciate more rapidly than we
currently expect in 2018-20. Changes in the producer price index reflect similar risks. After
declining by an average of 2% a year in 2013-16, producer prices rebounded by 3.3% in 2017
owing to a recovery in global commodity prices. We expect this trend to continue, albeit at a
weaker rate than in 2017, with producer prices increasing by an average of 1.7% a year in 2018-22.
Exchange rates
After appreciating against the US dollar in 2017, we expect that the local currency will come under
downward pressure in 2018-20, largely as a result of the more troubled outlook for external
demand. The narrowing interest-rate differential between South Korea and the US, as the Fed
raises its policy interest rate further in 2018-19, will add to depreciatory pressure. We expect the
won to weaken from an average of W1,131:US$1 in 2017 to W1,175:US$1 in 2020. It will then
strengthen on the back of improved global trade growth towards the end of the forecast period, to
an annual average of W1,147:US$1 in 2021-22.
External sector
As a proportion of nominal GDP, the current-account surplus will, on average, shrink over 2018-22
compared with 2013-17, mainly owing to volatile global trade conditions. We expect the currentaccount
surplus to average the equi valent of 5.8% of GDP over the forecast period, compared
with an estimated 6.5% in 2013-17. Goods exports will be hit by significant slowdowns in China
and the US, as well as increased competition for certain key export items from regional peers,
including China. However, import growth will also be subdued, helping to keep the trade account
in the black. The deficit on the services account will narrow as tourism flows from China rise in
2018-22. We expect the primary income account to maintain a small surplus over the forecast
period, while the secondary income account will remain in deficit.
Forecast summary
Forecast summary
(% unless otherwise indicated)
2017a 2018b 2019b 2020b 2021b 2022b
Real GDP growth 3.2 2.5 2.6 2.4 2.9 3.2
Industrial production growth 1.4 0.7 2.0 1.0 2.7 2.3
Gross fixed investment growth 9.5 2.5 5.0 1.8 3.6 3.8
Unemployment rate (av) 3.7c 3.8 3.7 3.8 3.7 3.6
Consumer price inflation (av) 1.9c 1.8 1.7 1.4 1.9 2.1
Consumer price inflation (end-period) 1.5c 2.2 1.6 1.6 2.0 1.8
Short-term interbank rate 3.5 3.5 3.6 3.7 3.8 4.0
Government balance (% of GDP) 0.9 -0.3 -0.1 -0.5 0.1 0.2
Exports of goods fob (US$ bn) 575.9 590.3 614.3 611.8 661.1 693.3
Imports of goods fob (US$ bn) -452.3 -467.8 -490.9 -492.1 -525.7 -554.2
Current-account balance (US$ bn) 86.0 86.1 93.2 92.0 111.0 111.2
Current-account balance (% of GDP) 5.6 5.4 5.7 5.5 6.3 6.0
External debt (end-period; US$ bn)d 375.4 368.0 359.7 365.6 368.1 372.0
Exchange rate W:US$ (av) 1,131c 1,140 1,163 1,175 1,150 1,144
Exchange rate W:US$ (end-period) 1,071c 1,172 1,160 1,170 1,140 1,140
Exchange rate W:¥100 (av) 1,011c 1,047 1,088 1,130 1,150 1,141
Exchange rate W:€ (av) 1,275c 1,337 1,343 1,404 1,380 1,415
a
Economist Intelligence Unit estimates. b
Economist Intelligence Unit forecasts. c
Actual. d
On a balance-ofpayments
basis; includes both foreign- and local-currency-denominated debt held by non-residents.
South Korea
8
Country Report January 2018 www.eiu.com © Economist Intelligence Unit Limited 2018
Quarterly forecasts
Quarterly forecasts
2017 2018 2019
1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr
GDP
% change, quarter on quarter 1.1 0.6 1.5 0.2 0.7 0.5 0.4 0.7 0.7 0.6 0.8 0.8
% change, year on year 3.0 2.7 3.8 3.4 3.0 3.0 1.8 2.3 2.3 2.4 2.8 2.9
Private consumption
% change, quarter on quarter 0.4 1.0 0.8 0.5 0.5 0.4 0.3 0.6 0.7 0.6 0.8 0.8
% change, year on year 2.0 2.3 2.6 2.9 3.0 2.3 1.7 1.8 1.9 2.1 2.7 2.9
Government consumption
% change, quarter on quarter 0.5 1.1 2.3 1.5 -0.9 2.0 2.0 1.2 -0.9 1.4 1.8 2.3
% change, year on year 2.7 3.2 4.6 5.5 4.0 5.0 4.6 4.3 4.3 3.6 3.4 4.6
Gross fixed investment
% change, quarter on quarter 4.9 1.8 1.2 0.8 0.4 0.3 0.2 0.5 1.7 1.7 1.8 1.8
% change, year on year 10.4 9.6 9.2 8.9 4.3 2.7 1.7 1.4 2.7 4.1 5.8 7.3
Exports of goods & services
% change, quarter on quarter 2.1 -2.9 6.1 -2.1 0.3 0.2 0.1 0.3 0.7 0.6 0.8 0.8
% change, year on year 3.9 0.0 5.0 3.0 1.3 4.4 -1.5 0.9 1.3 1.7 2.5 3.0
Imports of goods & services
% change, quarter on quarter 4.8 -1.0 4.7 0.3 0.0 -0.2 -0.3 0.0 1.3 1.3 1.4 1.4
% change, year on year 9.9 6.4 8.5 8.9 3.9 4.8 -0.1 -0.4 0.9 2.4 4.1 5.6
Domestic demand
% change, quarter on quarter 2.0 1.7 0.6 1.5 0.3 0.2 1.1 0.2 3.1 -2.4 6.9 -2.8
% change, year on year 5.2 5.6 5.0 5.9 4.1 2.7 3.2 1.8 4.6 1.9 7.7 4.5
Consumer prices
% change, quarter on quarter 0.7 0.1 0.6 0.1 0.9 0.5 0.2 0.3 0.9 0.2 0.3 0.3
% change, year on year 2.1 1.9 2.3 1.5 1.7 2.0 1.7 2.0 1.9 1.6 1.7 1.7
Producer prices
% change, quarter on quarter 2.4 -0.8 0.3 0.0 1.4 -0.2 -0.1 0.3 0.5 0.0 0.3 0.0
% change, year on year 4.2 3.3 3.4 1.8 0.8 1.5 1.2 1.5 0.6 0.7 1.1 0.8
Exchange rate W:US$
Average 1,155 1,129 1,132 1,107 1,090 1,133 1,166 1,172 1,141 1,156 1,147 1,145
End-period 1,116 1,140 1,147 1,071 1,112 1,150 1,169 1,172 1,149 1,152 1,146 1,160
Interest rate (%; av)
Money market rate 1.2 1.2 1.2 1.3 1.9 1.9 1.9 1.8 1.8 2.1 2.2 2.3
Long-term bond yield 2.2 2.2 2.3 2.5 3.3 3.2 3.3 3.2 3.5 3.4 3.4 3.2
South Korea
9
Country Report January 2018 www.eiu.com © Economist Intelligence Unit Limited 2018
Data and charts
Annual data and forecast
2013a 2014a 2015a 2016a 2017b 2018c 2019c
GDP
Nominal GDP (US$ bn) 1,305 1,411 1,383 1,411 1,535 1,591 1,643
Nominal GDP (W trn) 1,429 1,486 1,564 1,637 1,736 1,814 1,910
Real GDP growth (%) 2.9 3.3 2.8 2.8 3.2 2.5 2.6
Expenditure on GDP (% real change)
Private consumption 1.9 1.7 2.2 2.5 2.4 2.2 2.4
Government consumption 3.3 3.0 3.0 4.3 4.0 4.5 4.0
Gross fixed investment 3.3 3.4 5.1 5.2 9.5 2.5 5.0
Exports of goods & services 4.3 2.0 -0.1 2.1 3.0 1.2 2.1
Imports of goods & services 1.7 1.5 2.1 4.5 8.4 2.0 3.3
Origin of GDP (% real change)
Agriculture 3.1 3.6 -0.4 -2.9 -0.8 0.5 0.7
Industry 3.3 3.1 2.4 3.3 4.8 2.5 3.5
Services 2.9 3.3 2.8 2.3 2.3 2.5 2.1
Population and income
Population (m) 50.2 50.4 50.6 50.8b 51.0 51.2 51.3
GDP per head (US$ at PPP) 32,785 33,828 35,497 36,859 38,573 40,298 41,871
Recorded unemployment (av; %) 3.1 3.5 3.6 3.7 3.7a 3.8 3.7
Fiscal indicators (% of GDP)
General government revenue 22.0 21.6 21.7 22.7 23.4 22.9 23.2
General government expenditure 21.0 21.0 21.7 21.6 22.5 23.2 23.3
General government balance 1.0 0.6 0.0 1.0 0.9 -0.3 -0.1
Public debt 40.5 43.7 45.7 45.5 43.4 42.6 41.8
Prices and financial indicators
Exchange rate W:US$ (end-period) 1,055 1,099 1,173 1,208 1,071a 1,172 1,160
Consumer prices (end-period; % change) 1.1 0.8 1.1 1.3 1.5a 2.2 1.6
Producer prices (av; % change) -1.6 -0.5 -4.0 -1.8 3.3 2.1 1.0
Stock of money M1 (% change) 9.7 13.6 20.9 12.3 10.0 7.1 15.0
Stock of money M2 (% change) 4.6 8.1 8.2 7.1 5.1 4.9 9.4
Lending interest rate (av; %) 4.6 4.3 3.5 3.4 3.5 3.5 3.6
Current account (US$ m)
Trade balance 82,781 88,885 122,269 120,446 123,534 122,569 123,466
Goods: exports fob 618,157 613,021 542,881 511,776 575,853 590,342 614,330
Goods: imports fob -535,376 -524,135 -420,612 -391,330 -452,319 -467,773 -490,864
Services balance -6,499 -3,679 -14,917 -17,608 -31,911 -31,953 -31,065
Primary income balance 9,056 4,151 3,572 1,459 444 1,837 7,353
Secondary income balance -4,189 -4,985 -4,985 -5,620 -6,116 -6,336 -6,546
Current-account balance 81,148 84,373 105,940 98,677 85,951 86,118 93,207
External debt (US$ m)
Debt stockd 404,585 407,001 376,642 358,161 375,357 367,974 359,748
Debt service paidd 15,166b 19,139b 42,419b 38,498b 35,971 39,328 42,789
Principal repaymentsd 9,108b 11,589b 35,256b 30,281b 25,859 27,533 28,372
Interestd 6,058b 7,550b 7,163b 8,217b 10,112 11,795 14,417
International reserves (US$ m)
Total international reserves 346,444 363,580 367,944 371,103 384,791 385,273 385,947
a
Actual. b
Economist Intelligence Unit estimates. c
Economist Intelligence Unit forecasts. d
On a balance-ofpayments
basis; includes both foreign- and local-currency-denominated debt held by non-residents.
Source: IMF, International Financial Statistics.
South Korea
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Country Report January 2018 www.eiu.com © Economist Intelligence Unit Limited 2018
Quarterly data
2016 2017
1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr
General government finance (W bn)
Revenue 96,106 95,113 95,150 84,895106,216103,314100,264 n/a
Expenditure 110,233 89,049 78,901 76,171110,134101,558 85,446 n/a
Balance -14,127 6,064 16,249 8,724 -3,918 1,756 14,818 n/a
Output (seasonally adjusted)
GDP at constant 2010 prices (W bn) 373,161376,536378,324380,245384,285386,583 n/a n/a
GDP at constant 2010 prices (% change,
year on year) 2.9 3.4 2.6 2.4 3.0 2.7 n/a n/a
Industrial production index (2010=100) 107.6 109.1 109.2 109.9 111.7 109.1 110.8 n/a
Industrial production (% change, year on
year) -0.3 1.6 -0.1 1.6 3.9 0.0 1.4 n/a
Employment, wages and prices
Employment (‘000) 25,554 26,387 26,554 26,446 25,915 26,754 26,833 26,707
Employment (% change, year on year) 1.1 1.1 1.2 1.2 1.4 1.4 1.1 1.0
Unemployment rate (% of labour force) 4.3 3.7 3.6 3.2 4.3 3.9 3.5 3.2
Average monthly wages, all industry (W
m) 3,535 3,221 3,465 3,481 3,625 3,332 3,575 n/a
Average monthly wages, all industry (%
change, year on year) 5.3 3.0 3.5 3.4 2.5 3.5 3.2 n/a
Consumer prices (2015=100) 100.5 100.7 100.9 101.8 102.5 102.7 103.2 103.3
Consumer prices (% change, year on
year) 0.9 0.8 0.7 1.4 2.1 1.9 2.3 1.5
Producer prices (2010=100) 98.6 98.6 98.9 100.3 102.7 101.9 n/a n/a
Producer prices (% change, year on
year) -3.3 -2.9 -1.8 0.8 4.2 3.3 n/a n/a
Financial indicators
Exchange rate W:US$ (av) 1,202 1,163 1,121 1,156 1,155 1,129 1,132 1,107
Exchange rate W:US$ (end-period) 1,154 1,165 1,096 1,209 1,116 1,140 1,147 1,071
Deposit rate (av; %) 1.7 1.6 1.4 1.6 1.6 1.6 n/a n/a
Lending rate (av; %) 3.5 3.4 3.2 3.3 3.5 3.4 1.2 n/a
3-month money market rate (av; %) 1.5 1.4 1.2 1.2 1.2 1.2 n/a n/a
Money supply, M1 (end-period; W trn) 723 744 749 796 794 816 837 n/a
Money supply, M1 (% change, year on
year) 19.6 14.7 10.2 12.3 9.8 9.8 11.7 n/a
Money supply, M2 (end-period; W bn) 2,296 2,338 2,380 2,407 2,438 2,464 2,510 n/a
Money supply, M2 (% change, year on
year) 7.9 6.7 7.2 7.1 6.2 5.4 5.5 n/a
KOSPI Composite stockmarket index
(end-period; Jan 4th 1980=100) 1,996 1,970 2,044 2,026 2,160 2,392 2,394 2,467
KOSPI Composite stockmarket index (%
change, year on year) -10.5 -10.4 8.6 3.4 12.7 25.0 16.0 27.1
Foreign trade (US$ m)
Exports fob 115,187126,024121,853132,361132,072147,047151,074143,672
Imports cif -93,830 -99,304 –
102,464

110,595

116,352

117,878

120,766

123,098
Trade balance 21,358 26,720 19,389 21,766 15,720 29,169 30,308 20,574
Foreign payments (US$ m)
Merchandise trade balance 30,209 33,175 28,184 27,328 27,307 29,561 34,750 n/a
Services balance -3,659 -4,205 -5,549 -4,325 -8,663 -6,749 -8,498 n/a
Primary income balance 1,382 -717 2,325 863 1,375 -4,877 1,947 n/a
Net transfer payments -971 -1,213 -2,395 -1,188 -816 -1,484 -2,630 n/a
Current-account balance 26,961 27,040 22,564 22,678 19,203 16,452 25,570 n/a
Reserves excl gold (end-period) 365,045365,095372,976366,307370,507375,773379,879384,472
Sources: Bank of Korea; IMF, International Financial Statistics.
Monthly data
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Exchange rate W:US$ (av)
South Korea
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Country Report January 2018 www.eiu.com © Economist Intelligence Unit Limited 2018
2015 1,089 1,098 1,113 1,089 1,091 1,112 1,143 1,179 1,185 1,148 1,152 1,172
2016 1,202 1,217 1,188 1,148 1,172 1,171 1,144 1,112 1,107 1,125 1,162 1,182
2017 1,185 1,145 1,135 1,133 1,125 1,130 1,134 1,131 1,132 1,132 1,105 1,086
Exchange rate W:US$ (end-period)
2015 1,091 1,099 1,105 1,068 1,108 1,124 1,166 1,176 1,195 1,142 1,150 1,172
2016 1,208 1,235 1,154 1,144 1,191 1,165 1,126 1,119 1,096 1,145 1,169 1,209
2017 1,158 1,132 1,116 1,130 1,124 1,140 1,119 1,123 1,147 1,125 1,082 1,071
General government revenue (W bn)
2015 34,393 16,196 30,532 40,243 24,205 23,561 37,602 23,858 25,059 35,219 23,450 24,868
2016 38,038 23,572 34,496 45,060 26,333 23,720 39,065 29,024 27,061 36,014 22,893 25,988
2017 45,058 23,842 37,316 48,047 30,471 24,796 41,950 30,305 28,009 40,903 n/a n/a
General government expenditure (W bn)
2015 28,564 31,131 37,633 33,065 24,841 37,791 22,790 24,670 33,652 18,207 17,859 29,148
2016 28,685 35,047 46,501 26,713 26,100 36,236 22,950 21,319 34,632 26,946 19,137 30,088
2017 30,207 34,685 45,242 35,058 28,250 38,250 23,698 29,013 32,735 26,334 n/a n/a
General government balance (W bn)
2015 5,829 -14,935 -7,101 7,178 -636 -14,230 14,812 -812 -8,593 17,012 5,591 -4,280
2016 9,353 -11,475 -12,005 18,347 233 -12,516 16,115 7,705 -7,571 9,068 3,756 -4,100
2017 14,851 -10,843 -7,926 12,989 2,221 -13,454 18,252 1,292 -4,726 14,569 n/a n/a
Money supply, M1 (% change, year on year)
2015 11.5 15.9 16.4 18.5 18.4 20.0 21.2 20.4 23.4 22.0 19.3 20.9
2016 20.5 18.2 19.6 17.1 15.2 14.7 14.1 14.0 10.2 11.9 12.6 12.3
2017 11.9 10.3 9.8 10.7 9.5 9.8 8.4 7.2 11.7 7.9 7.0 n/a
Money supply, M2 (% change, year on year)
2015 7.7 8.2 8.5 9.4 9.1 9.6 8.9 8.9 9.0 8.3 7.0 8.2
2016 8.4 7.8 7.9 6.9 6.5 6.7 7.6 7.3 7.2 6.8 7.4 7.1
2017 5.7 6.2 6.2 6.6 5.7 5.4 4.5 4.3 5.5 4.6 4.9 n/a
Industrial production (seasonally adjusted; % change, year on year)
2015 -3.3 -0.2 -1.3 -1.7 -1.1 -1.3 -3.0 2.1 3.1 2.7 0.3 -1.8
2016 -0.7 0.4 -0.6 -0.8 4.5 1.1 3.0 -1.5 -1.6 -1.3 3.7 2.5
2017 7.3 1.0 3.4 1.9 -1.3 -0.5 -0.1 2.4 2.0 1.4 -1.4 n/a
Unemployment rate (%)
2015 3.8 4.6 4.0 3.9 3.8 3.9 3.7 3.4 3.2 3.1 3.1 3.2
2016 3.7 4.9 4.3 3.9 3.7 3.6 3.5 3.6 3.6 3.4 3.1 3.2
2017 3.8 5.0 4.2 4.2 3.6 3.8 3.5 3.6 3.4 3.2 3.2 3.3
Deposit rate (av; %)
2015 2.2 2.1 2.0 1.8 1.8 1.7 1.6 1.6 1.6 1.6 1.7 1.8
2016 1.7 1.7 1.6 1.6 1.6 1.5 1.4 1.4 1.4 1.5 1.6 1.7
2017 1.6 1.6 1.6 1.6 1.6 1.6 1.6 1.6 n/a n/a n/a n/a
Lending rate (av; %)
2015 3.9 3.9 3.6 3.4 3.6 3.5 3.4 3.4 3.4 3.4 3.4 3.5
2016 3.5 3.5 3.5 3.4 3.5 3.3 3.2 3.2 3.3 3.3 3.3 3.4
2017 3.5 3.5 3.5 3.4 3.5 3.4 3.5 3.4 n/a n/a n/a n/a
KOSPI Composite stockmarket index (end-period; Jan 4th 1980=100)
2015 1,949 1,986 2,041 2,127 2,115 2,074 2,030 1,941 1,963 2,029 1,992 1,961
2016 1,912 1,917 1,996 1,994 1,983 1,970 2,016 2,035 2,044 2,008 1,983 2,026
2017 2,068 2,092 2,160 2,205 2,347 2,392 2,403 2,363 2,394 2,523 2,476 2,467
Consumer prices (av; % change, year on year)
2015 1.0 0.7 0.5 0.4 0.5 0.7 0.7 0.7 0.5 0.8 0.8 1.1
2016 0.6 1.1 0.8 1.0 0.8 0.7 0.4 0.5 1.4 1.5 1.5 1.3
2017 2.0 1.9 2.2 1.9 2.0 1.9 2.3 2.6 2.1 1.8 1.3 1.5
Producer prices (av; % change, year on year)
2015 -3.3 -3.8 -3.6 -3.5 -3.5 -3.7 -4.1 -4.6 -4.5 -4.6 -4.7 -4.0
2016 -3.3 -3.3 -3.2 -3.0 -3.0 -2.7 -2.5 -1.8 -1.1 -0.1 0.7 1.8
2017 4.1 4.1 4.3 3.8 3.4 2.8 3.0 3.4 3.8 3.7 3.0 n/a
Goods exports fob (US$ m)
2015 45,105 41,472 46,823 46,222 42,327 46,555 45,696 39,107 43,432 43,352 44,285 42,380
2016 36,260 35,925 43,002 41,082 39,734 45,209 40,882 40,125 40,846 41,983 45,309 45,069
2017 40,263 43,169 48,640 50,847 44,925 51,274 48,834 47,112 55,128 44,986 49,619 49,068
Goods imports cif (US$ m)
2015 39,283 33,998 38,486 37,859 36,040 36,598 38,647 34,772 34,541 36,763 34,050 35,462
2016 31,322 29,163 33,344 32,389 33,025 33,890 33,372 35,104 33,988 35,050 37,241 38,304
2017 37,605 36,179 42,567 37,982 39,322 40,573 38,582 40,506 41,678 37,828 41,986 43,285
Trade balance fob-cif (US$ m)
South Korea
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Country Report January 2018 www.eiu.com © Economist Intelligence Unit Limited 2018
2015 5,822 7,474 8,337 8,363 6,288 9,956 7,049 4,335 8,892 6,589 10,235 6,918
2016 4,939 6,761 9,658 8,693 6,708 11,319 7,510 5,021 6,858 6,933 8,068 6,765
2017 2,658 6,990 6,073 12,865 5,603 10,701 10,252 6,606 13,450 7,158 7,633 5,783
Foreign-exchange reserves excl gold (US$ m)
2015 357,392 357,575 357,956 365,107 366,711 369,955 366,028 363,143 363,319 364,806 363,669 363,167
2016 362,499 360,963 365,045 367,687 366,102 365,095 366,589 370,665 372,976 370,372 367,191 366,307
2017 369,242 369,114 370,507 371,779 373,661 375,773 378,961 380,044 379,879 379,668 382,456 384,472
Sources: IMF, International Financial Statistics; Haver Analytics.
Annual trends charts
South Korea
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Quarterly trends charts
South Korea
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Monthly trends charts
South Korea
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Country Report January 2018 www.eiu.com © Economist Intelligence Unit Limited 2018
Comparative economic indicators
Basic data
Land area
99,678 sq km
Population
50.5m (2016; UN)
Main towns
South Korea
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Country Report January 2018 www.eiu.com © Economist Intelligence Unit Limited 2018
Population in ’000 (2015; UN)
Seoul (capital): 9,860
Busan: 3,400
Incheon: 2,886
Daegu: 2,455
Daejeon: 1,536
Gwangju: 1,516
Climate
Continental, with extremes of temperature
Weather in Seoul (altitude 87 metres): Hottest month, August, 26.5°C; coldest month, January,
minus 0.4°C; driest month, January, 10.8 mm average rainfall; wettest month, July, 274.1 mm
average rainfall
Language
Korean
Measures
Metric system. Some local measures are:
1 pyong = 3.3058 sq metre
1 chungbo = 0.992 ha
1 suk = 100 dai = 180.39 litres
1 kwan = 1,000 don = 3.75 kg
Currency
Won (W). Average exchange rate in 2017: W1,131:US$1
Time
9 hours ahead of GMT
Public holidays
January 1st (New Year’s Day); February 15th­18th (Lunar New Year); March 1st (Independence
Movement Day); May 7th (Children’s Day); May 22nd (Buddha’s birthday); June 6th (Memorial
Day); June 13th (Local Election Day); August 15th (Liberation Day); September 23rd-25th
(Chuseok holidays); October 3rd (National Foundation Day); October 9th (Hangeul Day);
December 25th (Christmas Day)
South Korea
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Political structure
Official name
Republic of Korea
Form of state
South Korea
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Country Report January 2018 www.eiu.com © Economist Intelligence Unit Limited 2018
Presidential system; the president and the National Assembly (parliament) are directly elected;
members of parliament are elected using a mixed system of first past the post and proportional
representation
The executive
The president (elected for a single term of five years) appoints the State Council (the cabinet),
which comprises the president, the prime minister and 15-30 ministers. Cabinet ministers are not
normally members of the National Assembly
Head of state
Elected president
Legislature
Unicameral Kuk Hoe (National Assembly) elected for a four-year term. The current assembly,
which was elected in April 2016, has 300 seats. Most of the assembly’s seats are filled by election
from geographical constituencies, with the remainder distributed among the various parties in
proportion to their shares of the national vote
National elections
The next parliamentary poll will be held in April 2020. The last parliamentary and presidential
elections were held in April 2016 and May 2017 respectively
National government
The government is led by the president, Moon Jae-in, who was elected in May 2017 for a single
five-year term. He succeeded Park Geun-hye, who was impeached in March 2017 following a
corruption scandal. The former president is currently awaiting trial in jail on related bribery
charges
Main political organisations
Minjoo Party of Korea (formerly known as the New Politics Alliance for Democracy), Liberty
Korea Party (formerly the Saenuri Party), People’s Party, Bareun Party, Justice Party
Main members of the State Council
President: Moon Jae-in
Prime minister: Lee Nak-yon
Deputy prime minister: Kim Dong-yeon
Key ministers
Defence: Song Young-moo
Employment & labour: Cho Dae-yop
Environment: Kim Eun-kyung
Foreign affairs: Kang Kyung-wha
Health & welfare: Moon Hyung-pyo
Interior: Kim Boo-kyum
Justice: Ahn Kyong-whan
Land, infrastructure & transport: Kim Hyun-mee
Strategy & finance: Kim Dong-yeon
Trade, industry & energy: Kim Hyung-chong
Unification: Hong Yong-pyo
South Korea
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Country Report January 2018 www.eiu.com © Economist Intelligence Unit Limited 2018
Central bank governor
Lee Ju-yeol
South Korea
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Country Report January 2018 www.eiu.com © Economist Intelligence Unit Limited 2018
Recent analysis
Generated on February 7th 2018
The following articles have been written in response to events occurring since our most recent forecast was
released, and indicate how we expect these events to affect our next forecast.
Politics
Forecast updates
South Korea turns to WTO over new US tariffs
January 24, 2018: International relations
Event
On January 23rd Kim Hyun-chong, the trade minister, said that South Korea would file a complaint
with the World Trade Organisation (WTO) over the US’s imposition of import tariffs on foreign
washing machines.
Analysis
South Korea’s response to the tariffs expands the front of trade tensions with the US. Earlier in
January South Korea asked the WTO for authorisation to impose annual sanctions, worth at least
US$711m, on the US, as the latter had failed to comply with past WTO dispute settlement
decisions in favour of South Korea over its washing machine exports. The two countries were also
involved in a separate trade dispute at the WTO over steel pipes used in oil drilling.
South Korea’s two largest electronics exporters, Samsung Electronics and LG Electronics—which
were cited in the complaint of their US rival, Whirlpool, to the US International Trade Commission
that led to the new tariffs—export about 2.5m washing machines worth a total of US$1bn to the
US annually. The new US tariffs will add a 20% import duty on the first 1.2m units and 50% on all
subsequent imports in the first year of implementation.
This aggressive trade move by the US takes place amid ongoing bilateral negotiations to revise
the 2012 free-trade agreement (FTA). The US administration’s hard line comes as a slap in the face
for South Korean officials, which have been working to assuage attacks by the US president,
Donald Trump, against the deal since he came to power in January 2017. As a result of these
efforts to rebalance bilateral trade, South Korea’s merchandise surplus with the US was cut by
22.7% in 2017 compared with 2016. Last year both Samsung and LG also announced plans to build
plants in the US to produce washing machines there.
In terms of the impact on the ongoing FTA renegotiations, we have long expected that some
concessions would be extracted by the US. However, Mr Trump’s willingness to adopt aggressive
trade measures against South Korea is concerning with regard to the security situation with North
Korea. Escalating trade tensions at a time when South Korea is engaged in diplomatic outreach
with the North appears counterproductive at best.
Impact on the forecast
This development weakens the prospect for a relatively smooth renegotiation of the FTA.
However, at present we do not expect the trade tensions to affect the strong security relationship
between the two countries, which are allied against the North Korean nuclear threat.
South Korea
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Country Report January 2018 www.eiu.com © Economist Intelligence Unit Limited 2018
Economy
Forecast updates
BOK leaves policy setting unchanged in January
January 23, 2018: Monetary policy outlook
Event
Following a regular meeting on January 18th, the Bank of Korea (BOK, South Korea’s central
bank) left its main policy interest rate, the base rate, unchanged at 1.5%.
Analysis
As The Economist Intelligence Unit had expected, the BOK kept its policy rate on hold after
raising it in November 2017, from a record low of 1.25%. This is in line with the “forward guidance”
given by the governor of the BOK, Lee Ju-yeol, who hinted in November at another rate increase
by mid-2018. In our previous forecasting round, we were less bullish on the BOK’s ability to
continue with even modest monetary policy tightening owing to our view of a sharp economic
slowdown in China this year. China is South Korea’s largest trade partner and, therefore, the
impact of this slowdown on South Korea’s export-driven economy would have resulted in a
renewed accommodative monetary policy stance by the BOK. However, we have recently revised
up our 2018 real GDP growth forecast for China significantly, from 5.8% to 6.4%, as it has become
apparent that the Chinese government will not prioritise its deleveraging programme in the manner
that we had expected.
As a result, we now forecast that the BOK will go ahead with further interest-rate increases as
South Korea’s GDP continues to grow at a steady pace in 2018–19. This will align monetary policy
in South Korea with the tightening cycle in the US, where the Federal Reserve is forecast to raise
its policy rates at a fairly aggressive pace over the same period. However, we continue to expect
that efforts to “normalise” monetary policy in South Korea will be slower. Although rising US
interest rates will put some downward pressure on the local currency, the won, we believe that the
BOK will prioritise domestic economic conditions and local financial stability. This point was
reinforced by Lee Ju-yeol in his accompanying statement on January 18th. The pace of
normalisation will also be moderated by low inflationary pressure. We share the BOK’s consumer
price inflation forecast of 1.8% a year on average in 2018–19.
Impact on the forecast
Owing to the upward revision to our growth forecast for China in 2018, we now expect the BOK to
proceed with a fresh interest-rate increase by mid-year, taking the rate to 1.75%.
South Korea
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Country Report January 2018 www.eiu.com © Economist Intelligence Unit Limited 2018
Strong export growth continues in January
February 2, 2018: External sector
Event
On February 1st the Ministry of Trade, Industry and Energy reported a 22.2% year-on-year
increase in merchandise exports in January, the fastest pace of growth for that month since 2011.
Analysis
Export growth in January was the third-highest rate since November 2016, when the current streak
of monthly gains began. Extending the 15.8% surge in exports recorded in 2017 as whole, the
strong data for January suggest that the current recovery in global economic growth will continue
to support worldwide demand for South Korean goods. Growth was broad-based across South
Korea’s main export portfolio, with semiconductors and petrochemicals extending their upward
trend to 16 months.
Growth in petrochemical exports, measured in value terms, is buoyed by rising global oil prices.
We expect this trend to continue in 2018. The steady 53.4% year-on-year expansion for
semiconductor exports in January was better than we had anticipated. The cyclical demand for
this type of product is, however, still at risk of moderating as it relies largely on the success of
new product releases, such as smartphones. On the import side, merchandise inbound
shipments, most of which feed into export industries, totalled US$45.5bn in January, up by 20.9%
year on year. The resulting trade surplus amounted to US$3.7bn, extending South Korea’s trade
surplus streak to 72 months.
China’s role in sustaining South Korea’s export growth as the country’s largest export market will
remain vital amid the government’s efforts to “normalise” bilateral ties, which have been strained
over South Korea’s delicate geopolitical positioning between the US and China. In January South
Korean shipments to China increased by 24.5% year on year, the biggest monthly rise in the
current export growth cycle. Yet the US is emerging as the biggest risk factor, with protectionist
headwinds strengthening against key South Korean exports to the country’s second-largest
export market. South Korean exports to the US grew by 4.8% year on year in January, while
imports from the US surged by 22.4%. Sales of home appliances, which were recently hit by US
import tariffs, fell by 20.4%, while shipments of cars tumbled by 17.9%. South Korea’s bilateral
trade surplus with the US narrowed by 67%, to US$320m, in January.
Impact on the forecast
We will leave our view of a slight moderation in export performance in 2018 unchanged. However,
should the strong start of the year extend to the following months, we will revise up our forecast.
South Korea
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Country Report January 2018 www.eiu.com © Economist Intelligence Unit Limited 2018
Inflation starts 2018 on a subdued note
February 2, 2018: Inflation
Event
On February 1st Statistics Korea released data showing that the consumer price index (CPI)
increased by 1% year on year in January, the lowest monthly reading since August 2016, when
the CPI rose by 0.5%.
Analysis
Food was the main factor weighing on headline inflation in January due to a high base of
comparison with January 2017. Prices for food and non-alcoholic beverages declined by 0.3% year
on year, compared with a 5.3% surge in the same month of 2017. Prices for perishables such as
vegetable and fisheries goods fell by 2.6%, compared with a 12% jump in January 2017.
Core inflation, which excludes food and energy prices, also came in at a low of 1.2% year on year,
compared with an average of 1.5% in 2017 as a whole. The last time monthly core inflation was this
low was August 2012. Services prices grew by 1.4%, the lowest rise since February 2014. The
government’s 16.4% increase in the national minimum wage, which came into effect in January,
and the impact on the CPI so far looks limited. Price rises in the restaurant and hotel industry
category averaged 2.8% in January, little changed from 2.7% in the previous month.
The low inflation in January supports our view of a deceleration in price growth in 2018 compared
with 2017, as underlying inflationary pressure remains mild. Should inflation weaken at a faster
pace in the coming months, this would complicate the strategy of the Bank of Korea (BOK, South
Korea’s central bank) to normalise monetary policy. The BOK is set to proceed, by mid-2018, with
another interest-rate rise after a 25-basis-point increase in its policy rate, to 1.5%, in
November 2017. However, the scenario of a sharp deceleration in inflation is not our central
forecast. We believe that, although moderate, the pace of inflation will be sustained by rising
global oil prices and steady domestic economic conditions and will allow the BOK to modestly
tighten monetary policy.
Impact on the forecast
The latest inflation data are consistent with our view that the annual increase in the CPI will
decelerate slightly to 1.8% in 2018, from 1.9% in 2017, with underlying inflationary pressure
remaining mild. This will be sufficient to allow the BOK to proceed with a modest interest-rate
increase by mid–2018.
South Korea
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Country Report January 2018 www.eiu.com © Economist Intelligence Unit Limited 2018
Samsung heir walks free
February 6, 2018: Policy trends
Event
On February 5th the Seoul High Court overturned the lower-court ruling against Lee Jae-yong,
vice-chairman of Samsung Electronics and heir to control of the Samsung Group, and set him free
by suspending his reduced jail sentence.
Analysis
In a reversal of the first-trial outcome of five years in prison, the appeals court reduced the
sentence to two years and six months and suspended it for four years. Lee Jae-yong, who had
already served nearly a year in prison, walked free after the court dismissed much of the
corruption evidence brought against him. The special prosecutor investigating Lee Jae-yong’s
alleged dealings with Park Geun-hye, the impeached former president, had indicted him on five
charges including bribery, embezzlement and perjury. The lower court had accepted the
prosecution’s argument that Lee Jae-yong was a willing participant in a collusion scheme with
Park Geun-hye and her long-time confidante, Choi Soon-sil, over his consolidation of management
control of the Samsung Group. However, the second-court ruling portrayed Lee Jae-yong as a
passive victim of a racketeering scheme led by the former president. Nonetheless, legal issues are
not over for the Samsung heir because the prosecution vowed to take the case to the Supreme
Court for a final verdict.
The case against Lee Jae-yong is only the latest addition to the long list of captains of industry
caught up in cosy relationships with politicians. Shin Dong-bin, chairman of the Lotte Group, is
next in line for a lower-court ruling this month on similar, but less serious, charges before Park
Geun-hye’s own turn to face a first-trial verdict. Under previous governments, the nation’s top
businessmen running afoul of the law often got away with suspended jail terms or presidential
pardons.
We do not expect the same pattern of pardons to prevail under the current, liberal administration
given its strong stance on reform of family-controlled business conglomerates known as chaebol.
Although the judiciary’s latest decision has no direct impact on the executive’s policy drive, Lee
Jae-yong’s lighter sentence still appears to be a damper on reform momentum by sending mixed
signals to foreign investors regarding future efforts to level the corporate playing field. It will also
reduce the incentive for the chaebol to reform their management structures, which are centralised
around family dynasties.
Impact on the forecast
The latest development supports our view that the government’s economic reform efforts to rein
in the excesses of the chaebol will translate into only modest progress.
Analysis
Steady GDP growth on track for 2018
January 29, 2018
South Korea’s economy stayed on a gradual recovery path in 2017, expanding by 3.1%,
compared with a growth rate of 2.8% in 2016. This was in line with The Economist
Intelligence’s estimate of 3.2% for the year. Real GDP expansion would have been stronger
were it not for the fact that growth in imports of goods and services outpaced that of exports. In
2018 continued external demand from South Korea’s main trade partners will provide a
supporting environment for growth, but we expect that the rate of economic expansion will
continue to be sustained largely by solid domestic demand.
Although the pace of GDP growth eased to 3% year on year in the fourth quarter, from 3.8% in the
third quarter, 2017 as a whole remains a year of solid economic performance. This is all the more
remarkable as last year was rocked by a series of political and international events, which could
have been highly disruptive for the economy. The impeachment and conviction of the former
South Korea
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Country Report January 2018 www.eiu.com © Economist Intelligence Unit Limited 2018
president, Park Geun-hye, on corruption charges, which also brought down the de facto chairman
of the largest conglomerate and biggest exporter, Samsung, had no lasting impact on the
economy. In addition, the country was under increased military threat from North Korea, which
continued to ramp up its missile and nuclear testing. Nonetheless, this also failed to hurt South
Korea’s economic attractiveness, as reflected by the appreciating trend of the local currency, the
won, against the US dollar in 2017.
Strong domestic demand and investment lifted imports
On a factor-cost basis, real GDP was buoyed in 2017 by the strong recovery in global demand, and
for electronic products in particular. This was illustrated by steady growth in manufacturing,
which rose by 4.2%, the fastest year-on-year rate since 2011. This was also visible on an
expenditure basis, with exports of goods growing by 3.7% for the year as a whole, compared with
2.2% in 2016. However, this performance was outweighed by faster growth in goods imports,
which jumped by 7.3%, resulting in a negative contribution of trade to GDP growth.
The surge in imports is nonetheless related to very positive developments for the South Korean
economy, as it was driven by solid domestic demand growth in 2017. At 2.6% last year, household
consumption maintained a positive growth trend for the third consecutive year. Consumer
sentiment, as measured by a survey conducted by the Bank of Korea (BOK, South Korea’s central
bank) improved throughout the year, with the index reading rising from 93 in January to 111 in
December. Household spending was supported by steady government spending, which grew by
3.7%. This was a slower rate compared with 4.3% in 2016, but is faster than the 2011–15 annual
average of 3%. Investment, a major driver of growth in 2017, also helped to lift imports: gross fixed
capital formation grew by a record high of 8.8%, the fastest rate of expansion in 18 years. Both of
its components, investment in construction and facilities, showed high rates of growth.
Fiscal policy will support consumption in 2018
Going forward, we expect the domestic drivers of growth to remain on track. Although the BOK is
set to raise its main policy interest rate, the base rate, from 1.5% to 1.75% by mid-2018, we do not
expect the modest efforts of the central bank to “normalise” its monetary policy to derail the
growth momentum. Enabled by moderate inflationary pressure, we believe that the BOK will
prioritise domestic economic conditions and is unlikely to hinder the government’s fiscal stimulus
efforts.
Consumption will continue to be supported by an expansionary fiscal policy. In the 2018 budget
adopted in early December, spending allocated to healthcare, welfare and jobs was up by 11.7%
from 2017, to W144.7trn (US$127bn), or 33% of the total outlay. The redistributive policy drive of
the liberal president, Moon Jae-in, is set to benefit household spending. The latter is likely to be
fuelled by measures such as the 16.4% increase in the hourly minimum wage, and by the rise in
public-sector employment. Investment growth, after the strong rebound in 2017, is likely to
decelerate in 2018 but will continue to make a positive contribution to GDP growth.
A dampening factor for construction activity will come from the 14.2% year-on-year cut in
infrastructure spending in the 2018 budget. Facilities investment may also be impeded by the
corporate income tax law amendment linked to the 2018 budget, which raised the tax rate on the
portion of corporate taxable income that exceeds W300bn (US$260m) to 25%, from 22%
previously. However, good external trade prospects will, overall, provide continued incentives for
investment growth.
Trade prospects in 2018
Our view on trade prospects for 2018 is broadly positive: in addition to a sanguine outlook for
demand from two of South Korea’s largest export markets, the US and the EU, we have recently
revised up our 2018 real GDP growth forecast for China, its largest trade partner, from 5.8% to
6.4%. As it has become apparent that the Chinese government will not prioritise its deleveraging
programme in the manner that we had anticipated, we now do not expect a sharp slowdown in
economic activity in that country this year. However, we still believe that the peak of the rebound
in global demand has passed, and this view was supported by the deceleration in South
Korea’s export growth recorded in the last quarter of 2017. As a result, we will lift our growth
forecasts for South Korea’s exports of goods and services and imports for 2018, from 1.2% and 2%
South Korea
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Country Report January 2018 www.eiu.com © Economist Intelligence Unit Limited 2018
respectively, but they will remain slightly below last year’s growth rates.
In the light of good trade prospects, supported by our steady economic outlook for China, the US
and the EU, and supportive fiscal policy in South Korea, we will revise up our current real GDP
growth forecast for 2018 of 2.5%. We do not expect the BOK’s progressive monetary policy
tightening to derail the growth momentum. Should the latter show signs of weakening, with
external demand performing worse than we anticipate, we believe that the BOK would revert to an
accommodative stance. In this context, the BOK’s projected real GDP growth rate of 3% in 2018
appears achievable. South Korea
27
Country Report January 2018 www.eiu.com © Economist Intelligence Unit Limited 2018

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