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Title Economic Outlook for 2018 and the Medium Term

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    2017-09-28
Economic Outlook for 2018 and the Medium Term

The Korean economy is expected to grow by 2.8% in 2018 despite the gradual recovery of private consumption, as construction investments decline and plant and equipment investments slow down. Among the expenditure components of GDP, private consumption will grow gradually, triggered by factors such as improved consumer confidence and the income-led growth policy. Yet, the expansion of consumption will be limited due to structural issues such as a widespread burden of debt service payments and increasing savings rate. While construction investment has been supporting Korean economic growth over the past three years, it is expected to decline due to reasons such as real estate regulatory policy and reduced SOC budget. As for plant and equipment investments, a slowdown is expected due to sluggish investment in non-IT sectors as well as the base effect from the high performance of the previous year. Due to the declining GDP deflator growth rate from the previous year, the nominal GDP growth rate of 2018 is expected to record 4.4%. Meanwhile, real GDP growth is expected to be 2.8% between 2017 and 2021, while per capita GDP is expected to surpass 30,000 dollars for the first time in 2018, exceeding 36,000 dollars by 2021.
Exports (customs cleared) are expected to increase in terms of volume as overseas import demand increases due to the global economic recovery in 2018, but the increasing rate of price per export unit will be significantly reduced to 3.1%, leading to an annual average export growth rate of 5.4% between 2017 and 2021, thanks to the ongoing global economic growth trend. In 2018, the current account surplus is expected to be around 69 billion dollars for the year, as the goods account balance decreases and services account balance remains in deficit. During the period between 2017 and 2021, the ratio of current account surplus to GDP is expected to decrease.
In 2018, 315 thousand people are expected to be newly employed, which is slightly less than the previous year; and due to a stagnant economic growth rate and sluggish job creation in traditional backbone industries, the number of employed is forecasted to increase by no more than 320 thousand per year between 2017 and 2021. As pressure increases from the demand side while decreasing on the supply side, consumer inflation is expected to reach 1.9% in 2018 and post 2.1% annual growth between 2017 and 2021. Government bond interest rates in 2018 are forecasted to be 2.2% due to factors such as the coupling of Korean and US market interest rates and a possible shift in monetary policy direction in major countries, and rise to 2.4% on average per year between 2017 and 2021. In 2018, the exchange rate of the Korean won against the US dollar is expected to be 1,115 won on average due to reasons such as the export recovery trend and the weakening dollar, while falling to 1,106 won on average per year between 2017 and 2021.
Over the next five years (2017~2021), the potential real GDP growth rate of Korea is forecasted to decrease by 0.2%p to 2.8% compared to 3.0% of the previous five years (2012~2016), as the level of labor contribution to potential growth is significantly reduced. The GDP gap during the next five years (2017~2021) is expected to remain the same as the previous 5-year period, at 2.8%, with a narrow surplus due to a decreased potential growth rate.

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