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Title Economic Forecast for 2019 and the Medium-Term

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1. Economic Forecast for 2019 and the Medium-Term

  • Although last year’s export growth trend is expected to be sustained as the global economy is continuing to grow, the real GDP growth rate of 2019 is estimated at 2.7% due to low investment.
  • Private consumption exhibited improvements in 2018, encouraged by factors such as increased wages and asset prices as well as government policies, but is expected to weaken slightly in 2019 due to low employment and rising interest rates.


  • Construction investments have spearheaded Korean economic growth through an average annual growth rate of 8.2% between 2015 and 2017, but they are expected to deteriorate more sharply in 2019 due to reasons such as the slowdown of the private construction sector, strengthened government regulations on real estate and budget cuts for state-owned corporations (SOCs).


  • Plant and equipment investments are expected to record low growth rates of 0.8% in 2018 followed by 2.3% in 2019, as semi-conductor investment expansion concludes and the burden of financing costs increases due to rising interest rates.


  • Exports (volume) are expected to support economic growth by exhibiting a reasonable growth trend, boosted by the continued global economic recovery in 2019.

Real GDP Gowth Rate Pojection 0 1 2 2012 2013 2014 2015 2016 2017 2018 2019 2.3 2.9 3.3 2.8 2.9 3.1 2.7 2.7 3 4 (Projection) (YoY, %) Real GDP Gowth Rate Pojection

Source: National Assembly Budget Office, Bank of Korea


  •  Upon examining the growth contribution of domestic demand and net exports to economic growth, it is projected that the contribution of domestic demand to growth will decrease whereas the contribution of net exports to growth will increase.
  • Domestic demand contribution rate(%p): 2.5 in 2018(estimate)→2.4 in 2019 (estimate)


  • Net exports contribution rate(%p): 0.2 in 2018(estimate)→0.3 in 2019(estimate)


  •  The 2019 nominal GDP is expected to grow by 4.3% compared to the previous year, backed by the increased GDP deflator growth rate.
  • The real GDP growth rate is expected to reach 2.7% both in 2018 and 2019, whereas the GDP deflator growth rate is expected to increase from 1.0% in 2018 to 1.6% in 2019.

- The 2019 GDP deflator is expected to be higher than that of the previous year overall, as the private consumption deflator increases and trade conditions recover from the rising crude oil prices.

2018~2022 Domestic Economic Forecast (Unit: %, US$100m,KRW)

  2017 2018 2019 2020 2021 2022
Gross Domestic Product 3.1 2.7 2.7 2.8 2.8 2.7
Private Consumption 2.6 2.8 2.7 2.7 2.7 2.6
Plant and Equipment Investment 14.6 0.8 2.3 3.5 3.2 3.3
Construction Investment 7.6 -1.5 -2.4 -0.8 0.3 1.1
Intellectual Property Product Investment 3.0 3.1 3.3 3.4 3.6 3.5
Total Exports 1.9 3.5 3.2 3.0 2.9 2.7
Total Imports 7.0 3.4 3.0 2.9 2.7 2.5
Current Account Balance(US$100m) 785 660 640 615 590 570
Export of Goods (Customs Cleared) 15.8 5.2 2.4 2.2 2.1 2.0
Import of Goods (Customs Cleared) 17.8 11.1 3.1 2.9 2.8 2.4
Unemployment Rate 3.7 3.8 3.8 3.7 3.7 3.8
Consumer Price Index 1.9 1.6 1.8 1.9 1.9 1.9
Treasury Bond Rate(3-year maturity) 1.8 2.2 2.4 2.6 2.6 2.6
USD/KRW Exchange Rate(Base Rate) 1,130 1,091 1,082 1,072 1,060 1,054
GDP Deflator 2.3 1.0 1.6 1.8 1.8 1.8
Nominal Gross Domestic Product 5.4 3.7 4.3 4.6 4.6 4.5


1. The unemployment rate is based on a 4-week job search, while the Korean Won’s exchange rate for the Dollar and Treasury Bond yield are yearly-averages.

2.The projections for 2017 and onward are made by the National Assembly Budget Office.

Source: National Assembly Budget Office, Bank of Korea, Statistics Korea


  •  Over the medium-term period of 2018 to 2022, real GDP growth rate is expected to reach an average of 2.7% per annum.
  • In this period, economic growth is expected to witness a sustained export growth trend thanks to moderate global economic conditions, supported by a gradual improvement of private consumption.

-Total exports between 2018 and 2022 are expected to increase each year by 3.1% on average, 1.0%p higher than the 2.1% recorded during the previous five-year period (2013-2017), and private consumption is also expected to show signs of recovery from 2.2% to 2.7%.


  • On the other hand, overall investments are expected to be slow.

-As construction investment enters a contraction phase and exhibits a continued decline over three years from 2018 to 2020, it will decrease by 0.7% on average each year over the medium term (2018~2022); while plant and equipment investment will fall from 4.7% between 2013 and 2017 to an average of 2.6% per annum over the next five years, due to weakened investment promotion mainly in the manufacturing sector.


  • Korea’s per capita GDP is expected to exceed $30,000 for the first time in 2018, and reach approximately $33,755 in 2019.
  • Supported by an increased nominal GDP and the appreciation of the Korean Won against the US Dollar, per capita GDP in 2019 is expected to reach approximately $33,755, 5.9% higher than the previous year.

- The National Assembly Budget Office made calculations based on estimations that per capita nominal GDP growth rates are 3.7% and 4.3% in 2018 and 2019, respectively; and that the average USD/KRW exchange rate per annum is KRW 1,091 and KRW 1,082 in each year of the same period.


2. Sector-Specific Forecasts

  •  Although private consumption in 2019 is likely to witness growth in terms of income conditions, it is expected to record a 2.7% increase—slightly lower than that of the previous year (2.8%)—due to the unfavorable employment situation and the increased burden of loan principal and interest repayments.
  • Private consumption improvement is expected to be limited due to the limited employment situation as proven through the lower-than-usual increase in employment, increased burden of loan principal and interest repayments due to an interest rate hike as well as higher rates of savings in preparation for post-retirement.


  • Still, improved real purchasing power resulting from the government’s income support policies and the strong Korean Won is expected to serve as a buffer against declining private consumption.

- The government income support policies such as the child allowance provision and increased basic pension benefits, as well as real purchasing power supported by the strong Korean Won serve as positive factors in boosting private consumption.

  • Private consumption is expected to increase by 2.7% on average per annum from 2018 to 2022.

-In the medium term, private consumption recovery is likely to be limited as extended life expectancy encourages increased savings and results in a smaller working age population, amid stagnant growth rates.

-However, the effects of government policies such as increased household incomes, expanded pension benefits for senior citizens and growing participation in the labor market are expected to support a gradual increase in private consumption.

  • Leading indicators of construction investment, such as those related to construction orders and the land area approved for construction, are maintaining a downward trend, giving rise to concerns that the construction investment slump will be aggravated.

 - Having experienced a major slump since the 3rd quarter of 2017, the number of construction orders also dropped by 9.1% in the first half of 2018.

- The land area approved for construction has also been significantly reduced, especially areas approved for residential usage, as redevelopment and reconstruction projects have been constrained through policies such as reinforced criteria for the precision safety diagnosis of existing apartments.

  • As construction investments are expected to remain low and enter a contraction phase between 2018 and 2022, they are expected to exhibit an annual decline of 0.7% on average.

- Since the declining trend began in 2018, construction investments are expected to face difficulties in breaking out of the sluggish trend for the time being, as private construction and government civil construction continue to struggle.


  • Plant and equipment investments in 2019 will show a gradual increase mainly led by the IT sector and chemicals industry, but due to the sluggish growth of other sectors, a low growth rate of 2% is expected.
  • Growth of the leading electric and electronics sectors, inclusive of semi-conductors and displays, have been adjusted and has been subdued due to investment adjustments; whereas the chemicals industry, for which international demand for refinery and petrochemical facilities is growing, is expected to receive continued plant and equipment investments in high value-added areas to strengthen competitiveness.


  • The auto industry has limited space to expand production facilities due to sluggish domestic demand and overseas facility expansions, while visible recovery of investments in the shipbuilding and steel industries is unlikely, due to the gradual recovery of global demand and ongoing efforts to secure supply capabilities.


  • Triggered by the struggling leading manufacturing sectors excluding semi-conductors but including electric and electronics, shipbuilding and automobiles, the downward trend of the capacity utilization rate is likely to serve as an obstacle against production facility expansion efforts.


  • Over the period of 2018 to 2022, investments are expected to increase annually by 2.6% on average, mainly in manufacturing industries linked to the fourth industrial revolution as well as the service industry responding to population aging and the changing structure of households.

-The proportion of plant and equipment investments of total fixed capital investments is expected to gradually increase due to the relatively weak investments in construction, and the proportion of the services sector in plant and equipment investments is also expected to gradually increase over the next five years.

-Increased horizontal foreign direct investment and the growing relative importance of intellectual property (IP) product investment—encouraged by the reduced manufacturing production rate, subdued global trade volume increase and heightened trade protectionism—are expected to hinder the increase of plant and equipment investments in the mid-to-long term.


  • IP product investments are expected to increase by 3.3% from the previous year, due to the continued increase of private R&D investment and an increased government R&D budget.
  • Affected by the increased global demand in the ICT industry as well as enhanced R&D investment and strengthened policy support in areas relevant to the quaternary sector, private R&D investments are expected to slightly increase from the previous year.


  • Government R&D investments are expected to increase by a larger rate compared to the previous year, as the R&D budgets set for ICT, software and areas relevant to the fourth industrial revolution have increased from 2018.


  • However, if the manufacturing sector deteriorates due to the economic slowdown, this could pose an obstacle to R&D investment growth in the private manufacturing sector.


  • IP product investments from 2018 to 2022 are expected to maintain a strong annual growth of 3.4% on average, thanks to the rise in R&D demand following the growth of knowledge-based industries.

- R&D investment is expected to maintain steady growth led by the private manufacturing sector, public administration and national defense as well as the knowledge-based services sector.

- Other intellectual product investments are expected to grow in accordance with the expansion of the software and cultural content markets, mainly led by relevant cultural services industries.

- Affected by the global growth of the ICT industry and quaternary sector as well as the production increase in knowledge-based industries, demand for relevant IP product investment is expected to continue to increase.

- The proportion of IP production investment in total fixed capital investments over the projected period will gradually increase from 17.7% in 2017 to 19.7% in 2022.


  • Exports (customs cleared) in 2019 are expected to maintain a growth trajectory as global economic growth continues, but at 2.4%, a rate lower than the previous year (estimated at 5.2%), due to lower export unit prices.
  • As for semi-conductor and petroleum-related products which have led overall exports, exports in the fields of shipbuilding, automobiles and home appliances are likely to remain weak as semi-conductor prices are in the decline, along with the base effect of the previous year, and the rise in oil prices is subdued as prices stabilize.


  • The nation’s trade balance in 2019 is expected to reach a surplus of around US$70 billion, which is around US$2 billion lower than that of the previous year.

- Trade balance (in US$100m):(‘17)952→ (’18 estimate)721→ (’19 estimate)702


  • Trade volume (the sum of export and import volume) in 2019 is expected to increase to above US$1 trillion for three consecutive years since 2017.

- Although trade volume failed to exceed US$1 trillion from 2015 to 2016 due to the global economic recession, it rebounded to above US$1 trillion in 2017 as the global economy showed signs of recovery, and is expected to maintain an increasing trend.

- Trade volume(in US$100m):(‘17)10,552→ (’18 estimate)11,350→ (’19 estimate)11,658

  • However, one risk factor related to international trade in 2019 is that the recently escalating US-China trade war increases uncertainty surrounding how the situation will unfold. If this becomes a long-term issue, a negative impact on Korean exports due to global trade contraction is seen as inevitable.

- In particular, if China, Korea’s largest export market, experiences a slowdown of economic growth due to the US-China trade war, the export of intermediary goods will be hit hardest, as it accounts for more than 78% of Korean exports to China.


  • The current account balance of 2019 is expected to reach a surplus of around US$64 billion per annum, as the surplus gap of the balance of trade in goods narrows.
  • Although the declining export growth rate and import growth rate will lead to a reduced surplus volume, the balance of trade in goods is still expected to record a major surplus of above US$100 billion.


  • The service balance, primary income account and balance of net current transfers are expected to record a deficit of around US$45.4 billion per annum, as the primary income account deteriorates under ongoing deficits in the travel balance and transportation balance.

- Although China’s THAAD retaliation measures led to an unprecedentedly significant deficit in the travel balance from 2017 to 2018, the deficit gap is expected to narrow and the number of Chinese tourists are gradually returning to normal levels.

- The transportation balance deficit is expected to remain for the time being, due to the global recession in the shipping industry and associated restructuring, and the primary income account is expected to record a deficit because of the increased dividends paid out by Korean companies to their foreign shareholders.


  • The ratio of the current account balance to nominal GDP during 2018-2022 is expected to gradually fall, due to the reduced volume of the current account surplus.

- The ratio of the current account balance (% of GDP) peaked in 2015 at 7.7%, gradually declining to around 5% in 2017, 4% in 2018 and is expected to fall to around the latter half of the 2% range by 2022.


  • The number of employed in 2019 is expected to increase by about 200 thousand from the previous year, affected by the continued weakening of working age population growth and the weakening ability of leading manufacturing sectors to create jobs.
  • The growth rate of the working age population has fallen at a rapid pace since the beginning of this year, and the population of those aged between 15 and 64 has begun to decrease significantly since 2018.


  • In 2019, the economic activity participation rate is expected to increase slightly, while the unemployment rate is expected to be the same as the current year at 3.8%.


  • However, as the government has significantly increased fiscal support for the job creation budget in 2019, employment numbers are expected to continue to increase mainly in the public sector such as public health and welfare as well as public administration, contributing to the overall improvement in employment conditions.


  • The number of employed is expected to increase by 205 thousand (0.8%) each year on average throughout 2018-2022, exhibiting a significant drop in the growth rate compared to the previous period of 2013-2017 (354 thousand employed, 1.4%).

- While the growth rate of the working age population will rapidly shrink, the economic activity participation rate and unemployment rate will gradually increase due to the aging of the working population and slower economic growth, leading to a smaller increase in the number of employed.

- In addition, weakened employment in the traditionally strong manufacturing industries excluding the IT manufacturing industry, and limitations in boosting employment mainly in some service sectors which suffer from low productivity, are some of the main reasons behind the quantitative drop in the employment growth trend.

- The digitalization and automation of the economy as well as the acceleration of the 4th industrial revolution will cause a reduction in labor demand within some industries where jobs can be substituted, and could possibly restrict the quantitative improvement of jobs.


  • As for 2019 consumer prices, although there will be less inflationary pressure from demand-side factors, consumer prices are expected to increase by 1.8%, which is higher than the previous year (1.6%), as core inflation exhibits a gradual growth trajectory.
  • While core inflation is expected to increase gradually due to enhanced household incomes and increased private consumption on the demand side, the upward pressure on the supply side is expected to decrease.

- As factors related to household income increases derived from government policy spur private consumption, they are expected to drive inflationary pressure from the demand side.

- In terms of supply, although there will be increased pressure to raise public utility fees, the impact of import prices on consumer prices will be reduced and there will be limited increases of service prices including a subdued increase in housing leasing prices.


  • The consumer price inflation rate in 2018-2022 is expected to gradually approach the medium term target level for consumer price stabilization set by the monetary authority.

- Over the medium term, inflationary pressure on the demand side is expected to continue, such as through the recovery of private consumption due to increased household incomes.

- From 2019 onward, the real GDP gap is likely to turn positive (+) due to a gradual consumption increase, and possibly pose inflationary pressure on the demand side.

- Meanwhile, since the USD/KRW exchange rate is expected to fall slowly and international crude oil prices are expected to remain stable over the medium term, such factors are likely to restrict consumer price inflation.


  • The Treasury bond (3-year maturity) interest rate in 2019 is expected to increase slightly to 2.4%, due to the impact of an interest rate rise due to the normalization of US monetary policy and Korean economic circumstances.
  • The widening reverse gap between the Korean and US key interest rates due to repeated US interest rate hikes adds upward pressure on Korean interest rates.

- The US core inflation rate has almost reached its target level of 2% and the US plans to continue to raise interest rates to prevent the economy from overheating; as such, the prolonged reversal of Korea-US key interest rates increases concerns about capital outflows and exerts upward pressure on interest rates in Korea.

  • Treasury bond rates (3-year maturity) throughout 2018-2022 are expected to record an annual average of 2.5%.

- Korean interest rates are expected to exhibit a gradual increasing trend as global interest rates rise following monetary policy normalization by the central banks of major economies.

- However, in consideration of Korean consumer prices and economic circumstances as well as the likelihood that US economic growth is expected to weaken beyond 2020, interest rates are expected to rise gradually.


  • The USD/KRW exchange rate in 2019 is expected to continue to drop from the previous year to an average of KRW1,082 against the dollar, considering factors including economic fundamentals, foreign currency liquidity supply and external soundness.
  • The ongoing current account surplus from flourishing exports and abundant inflows of foreign currency liquidity such as through the inflow of foreign securities investment capital, is expected to exert downward pressure on the USD/KRW exchange rate.

- Having maintained a continuous surplus since 1998, the current account balance as of July 2018 has reached a very impressive US$771.9 billion in terms of cumulative surplus.


  • Korea became a creditor nation in 2000 and secured a net international investment position (IIP) in 2014, and has enhanced its external payment ability and external soundness through efforts that include structural improvements in foreign bonds.

- Net external debt (US$100m): (end-2010)947→(end-2014)2,538→(end-June, 2018)4,549

- Net IIP (US$100m):(end-2010)-1,311→(end-2014)842→(end-June, 2018)3,211


  • A foreign exchange safety net has been established with high sovereign credit ratings and expanding currency swap agreements with major countries.

- As of 2018, the size of currency swap deals reached between Korea and major countries account for 33% of Korea’s foreign exchange reserves, which total around US$132.8 billion.


  • However, USD/KRW exchange rate volatility is still possible due to economic instability in emerging economies due to the normalization of monetary policies in major advanced economies as well as on how situations such as the US-China trade dispute unfold.


  • The USD/KRW exchange rate is expected to exhibit a gradual declining trend over the medium-term period of 2018-2022, as factors behind the strong KRW under the global trend of a weak USD remain.


3. Potential Growth Rate

  •  The potential annual growth rate of Korea over the period from 2018 to 2022 is estimated to be around 2.7% on average, slightly lower(by 0.3%p) than that of the previous five years.
  •  Since continued population aging will lead to a drop in labor contribution and stagnant contributions by capital and total factor productivity, the potential growth rate is expected to fall to an annual average of 2.7%.

- As for the potential contribution to growth by each factor, the contribution of labor is expected to fall relatively significantly, while the contributions of capital and total factor productivity are expected to remain at the same level as that of the previous five years.

- Potential contribution to growth over the next 5 years by production factor (annual average, %p: labor 0.0,capital 1.3,total factor productivity 1.4

- Weakened growth of the working age population, a higher unemployment rate and fewer working hours per week resulting from the effects of population aging are the major causes of weakening growth in total labor input.

- The contribution of capital to growth will slightly decrease from the previous period as construction investments decrease and plant and equipment investment growth decreases, while the average contribution of total factor productivity to growth (1.4%p) will increase slightly from the previous five-year period (1.3%p).

  • It appears that the real GDP gap1) which reflects economic status will be at a positive (+) level in 2021 and beyond, but inflationary pressure from demand-side factors is not expected to be significant.

- As for the real GDP gap over the forecasted five-year period, the real growth rate will drop in 2018, leading to a narrow negative (-) level throughout 2018 to 2019; whereas it is expected to turn positive (+) from 2021.

- From 2021 onwards, the real GDP gap will turn positive (+) thanks to consumption increases and investment recovery, making it possible for slight inflationary pressure on the demand side.



1) Defined as the percentage gap between the real GDP and its potential GDP estimate, the formula for which is “Output Gap = (Real GDP—Potential GDP)/Potential GDP x 100”. If the output gap is positive (+), this is taken to mean that there is inflationary pressure from excess total demand; and if it is negative (-), there is deflationary pressure from inadequate total demand.


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