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Title 2018 Economic Forecast

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 ▪ Real GDP for 2018 is forecast to rise at an annual rate of 3.0%, following last year's steady gain, due to higher private consumption and the upswing in exports.

     ◉ Exports are expected to grow steadily, as they did last year, as a result of higher global import demand on the strength of the rebound in the global economy, and private consumption is expected to rise thanks to improvements in the fundamentals for household income and consumer confidence, and the government's economic policies. All these factors will likely drive domestic economic growth.

     ◉ For the contribution to economic growth by sectoral expenditure (based on original series), domestic demand is expected to decline compared to the previous year while exports are expected to increase.
       - Construction investment will likely decline for the first time since 2012, reducing its contribution to economic growth to -0.2%p in 2018 from 1.2%p in 2017. 
       - The contribution of net exports (exports - imports) to economic growth is expected to rebound to 0.1%p in 2018 from -1.7%p in 2017.

     ◉ Economic growth is forecast at around 1.0%, which is higher than the potential growth rate of the Korean economy (around 0.7% year-on-year, NABO) during the first half and around 0.7% during the second half. 



 ▪ Nominal GDP for 2018 is forecast to rise at an annual rate of 4.8%, down 0.7%p from the last year.

     ◉ The fall in the nominal GDP growth rate is primarily attributed to a decline in the GDP deflator growth rate year-on-year.
      - GDP deflator growth rate (%):1.8 (2016) --> 2.4 (2017 estimates) --> 1.8 (2018 forecast)
      - Real GDP growth rate (%): 2.8 (2016) --> 3.1 (2017) --> 3.0 (2018 forecast)

     ◉ The GDP deflator growth rate is forecast to decline because the domestic demand deflator growth rate represented by capital investment and others is likely to fall due to the won's ascent against the dollar and the net export deflator growth rate will also likely decline due to the deterioration in terms of trade.


Domestic Economic Outlook for 2018






Real GDP




Private consumption




Capital investment




Construction investment




Intellectual property product investment




Gross exports




Gross imports




Current account balance (in USD 100 million)




Exports of goods (customs clearance)




Imports of goods (customs clearance)




GDP deflator




Consumer price index




Unemployment rate




KRW/USD exchange rate (basic exchange rate)




Three-year government bond yields




Nominal GDP




Note: 1. The unemployment rate assumes a job-seeking period of four weeks; and the exchange rate and government bond yields are the yearly averages.
        2. The GDP deflator and nominal GDP for 2017 are projections made by NABO.
Source: NABO, Bank of Korea, Statistics Korea


 ▪ Private consumption is expected to continue to rise moderately as the conditions for household income improve and real purchasing power increases.

     ◉ Private consumption for 2018 is forecast to rise 2.7% year on year, slightly outpacing the last year's rise of 2.6%.

     ◉ Amidst the ongoing economic recovery at home and abroad, the conditions for household income should improve as a result of the increase in nominal wages resulting from government policy to bolster the base for household income, the rise in minimum wages, and strong corporate profits.
       - The consumer price increase rate is forecast to fall in 2018, so real wages will increase slowly. 

     ◉ Private consumption is expected to rise slightly as real purchasing power increases owing to the appreciation of the won and more modest rise in oil prices.

     ◉ However, any increase in private consumption is likely to be limited because of the slower growth in the size of the labor force and the increased burden of household debt stemming from the hike in interest rates in 2018.



 ▪ Construction investment is projected to decrease this year in both the building and engineering sectors.

    ◉ Construction investment for 2018 is forecast to decrease by 1.1% year on year as a result of policies intended to stabilize the housing market and the reduction in the budget for social overhead capital (SOC).
       - The progress payments for construction projects started to decline in the fourth quarter of 2017. This year, the reinstatement of the system for restituting excess profits from reconstruction in January and the implementation of new DTI in February reduced demand for housing and caused transaction volume to contract.

    ◉ Civil engineering investment is forecast to decline considerably on account of a reduction in the SOC investment budget in the public sector.
       - The SOC budget that substantially affects the construction of railways and roads is expected to be reduced to KRW19.0 trillion, 14.2% down from the previous year.

    ◉ Investment in non-residential buildings is expected to rise at a slower rate, particularly in commercial buildings.
       - Construction investment for commercial buildings, especially in office and shopping center construction, is forecast to be slack because of prolonged weakness in domestic service industries and the higher domestic interest rates. 
       - Construction investment for industrial buildings is projected to slow down relatively gradually thanks to a recovery of exports and a steady rise in capital investment.



 ▪ Although the recovery momentum for capital investment is likely to be maintained owing to demand for investment related to the Fourth Industrial Revolution, capital investment will likely rise at a slower rate in light of the fact that last year's rise was particularly strong. 

    ◉ Capital investment in 2017 in production facilities rose considerably, primarily in semiconductor manufacturing devices and images, petroleum refining, and chemicals, which  benefitted directly from the general increase in exports.

    ◉ Capital investment in 2018 is expected to rise 4.0%, which compares starkly with 14.6% in 2017, but the momentum for recovery of investment is expected to persist.
       - The recovery in the demand for capital investment will likely be sustained through 2018 due to the global economic recovery, a boom in the IT sector, an increase in investment in basic technologies leading the Fourth Industrial Revolution, and the like.
       - In 2018, capital investment in non-manufacturing industries is likely to rise at a faster rate than in manufacturing industries, and small and medium-sized enterprises are projected to increase their capital investment.
       - Capital investment in the semiconductor, display, and petroleum refining industries is forecast to rise more slowly after the aggressive expansion of production facilities in the previous year, while capital investment in the steel industry is likely to fall because of ongoing concerns over a glut of steel around the globe. 



 ▪ Intellectual property product investment is forecast to rise at a slightly higher rate, particularly for R&D in the private sector.

    ◉ Intellectual property product investment for 2017 increased 3.1% year on year and accelerated during the second half as R&D and software investment rose.

    ◉ In 2018, intellectual property product investment is expected to show a modest rise of 3.3%, up slightly from the last year's 3.1%.
       - R&D investment in the private sector is forecast to continue to increase as a result of the recovery in the global economy, the Fourth Industrial Revolution, and the proliferation of the knowledge-based service industry.
       - As the budget for R&D investment in the public sector slightly increased, the investment will likely be restructured, particularly for some industries engaged in innovation including technological innovation of the Fourth Industrial Revolution.



 ▪ Exports (based on customs clearance) are forecast to rise at an annual rate of 6.1% due to the acceleration in the global economic recovery and higher global trade volume.

     ◉ In its World Economic Outlook report this past January, the International Monetary Fund adjusted its own forecast upward for the global growth rate and world trade volume in consideration of the stronger-than-expected rebound in the global economy.
        - Rate of increase in world trade volume (year-on-year, %): 4.0 (2017) --> 4.6 (2018 forecast)

     ◉ The export amount can be analyzed based on export unit value and volume. The rate of increase in export unit value will likely fall due to a meager increase in prices of semiconductors and raw materials, and export volume is likely to rise at a higher rate due to growing global import demand.
        - Increase rate of export unit value (year-on-year, %): 13.1 (2017) --> 2.7 (2018 forecast)
        - Increase rate of export volume (year-on-year, %): 2.7 (2017) --> 3.5 (2018 forecast)

     ◉ The trade surplus for 2018 is forecast at USD 91 billion, down from USD 95.2 billion last year. Trade volume, which combines the total value of exports and imports, is projected at USD 1.1266 trillion, up 7.1% from the last year, exceeding the previous record of USD 1.0982 trillion in 2014. 
        - However, the possibilities cannot be ruled out that the global trade order is undermined and trade is contracted if protectionist sentiment spreads around the globe.



 ▪ The current account balance for 2018 is forecast at about USD 74 billion, down from the last year, as the surplus in the goods account is expected to decrease while deficits in the services, primary income, and secondary income accounts will likely rise.

     ◉ The surpluses in the goods account are forecast to decrease as the increase rate of imports outstrips that of exports: the deficits in the services, primary income, and secondary income accounts are all expected to rise slightly.
         - Goods account (in USD 100 million): 1,199 (2017) --> 1,160 (2018 forecast)
         - Services, primary income, and secondary income accounts (in USD 100 million; year-on-year): - 414 (2017) --> - 420 (2018 forecast)\

     ◉ The current account surplus as a percentage of GDP has steadily fallen since peaking at 7.7% in 2015, and it is forecast at about 4% in 2018.
       - Current account surplus (% of GDP): 7.0 (2016) --> 5.1 (2017) --> 4.3 (2018 forecast)



 ▪ The number of workers hired is projected to increase to about 300,000 persons owing to the modest economic rebound and improvement in employment conditions in the service industry.

     ◉ In 2017, the number of workers hired increased to about 317,000 persons thanks to the recovery in construction and improvement in employment conditions in the manufacturing sector.
        - The unemployment rate for 2017 was 3.7%, about the same in the previous year. The youth unemployment rate remained high at 9.9%, up from 9.8% in the previous year.

     ◉ In 2018, employment conditions in the wholesale, retail, restaurant and hotel, and tourism industries are likely to improve at a slower pace than expected on account of gradual resolution of the conflict with China over the deployment of the THAAD missile system and the business slowdown in the construction industry.
        - The unemployment rate is forecast at 3.8% (4.1% for the first half and 3.5% for the second half), slightly up from 3.7% in the last year; the employment rate is projected at about 61.0%; and the labor force participation rate is expected to exceed 63% as in 2017 owing to the active participation of women and the elderly in the labor market.
        - It is difficult at the moment to quantitatively measure how changes in major labor policies such as a shortening of the workweek, minimum wage increase, unemployment benefits increase, and change in temporary positions to permanent positions in the public sector affect overall employment because of the great uncertainty in their effectiveness



 ▪ The consumer price index is projected to rise 1.7%, down from the last year, due to the modest pace of the economic recovery and mitigation of supply-side shocks.

     ◉ In light of aggregate demand, core consumer prices are expected to rise only slightly due to the modest economic recovery primarily led by private consumption and the rise in minimum wages.
        - Although the real GDP gap is positive, inflationary pressures are likely to be modest.
        - Personal service charges, such as costs of eating out, primarily in the restaurant and hotel, wholesale, and retail industries will likely increase owing to the rise in minimum wages.

     ◉ The mitigation of supply-side shocks of agricultural, livestock, and fishery products, a slower increase in international oil prices, and a fall in import prices resulting from the stronger won will blunt any rise in prices.
         - No further inflationary pressure is expected from the supply-side shocks of agricultural and fishery products that occurred last year, and international oil prices are projected to rise about 13%, which compares starkly with the 22.1% rise in the last year.
         - The continued appreciation of the won will likely serve to restrain inflation because it will naturally reduce import prices.



 ▪ The average annual interest rate on three-year government bonds is forecast at 2.3%, while continuing to rise moderately in the course of the global and domestic economic recovery and normalization of monetary policy.

      ◉ The interest rate on three-year government bonds continued to rise during the second half of 2017, widening the gap with the benchmark US federal funds rate.
         - International interest rates have recently increased sharply owing to the normalization of monetary policies by major industrialized countries, the strong recovery in the global economy, the increase in anticipated inflation, and the like. 

      ◉ The domestic market interest rates in 2018 are expected to increase gradually due to the moderate economic recovery, steady anticipated inflation, and the like.

      ◉ Upward pressures on international interest rates will likely grow in the course of the continued global economic recovery and normalization of monetary policies by major industrialized countries. 
         - The Korean and the US government bond interest rates will likely rise together, and the US government bond interest rate is likely to rise relatively fast. Hence, the bond spread between the two countries is expected to narrow and remain low for a considerable period of time.



 ▪ The average annual KRW/USD exchange rate is projected at KRW 1,058, down from the last year.

       ◉ The average annual KRW/USD exchange rate is forecast at KRW 1,058, a decrease of KRW 72 from the last year (KRW1,130).

       ◉ The won's climb against the dollar is attributed to the continued global and domestic economic recovery, abundant foreign currency liquidity stemming from the substantial current account surpluses, establishment of a safety net for foreign currency by an increasing number of countries signing currency swap agreements with Korea, and upgrading of Korea's sovereign credit rating.

       ◉ However, there is always a possibility that KRW/USD exchange rate volatility will actually increase in the event of a sudden stampede of global liquidity and contraction in investor confidence in the course of normalization of monetary policies by major industrialized countries.

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