1. Economic Forecast for 2019 and the Medium-Term
Source: National Assembly Budget Office, Bank of Korea
- 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)
|Gross Domestic Product||3.1||2.7||2.7||2.8||2.8||2.7|
|Plant and Equipment Investment||14.6||0.8||2.3||3.5||3.2||3.3|
|Intellectual Property Product Investment||3.0||3.1||3.3||3.4||3.6||3.5|
|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|
|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|
|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
－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%.
－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.
- 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
- 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.
－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.
- 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.
- 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.
－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.
- 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.
- Trade balance （in US$100m）:（‘17）952→ （’18 estimate）721→ （’19 estimate）702
- 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
- 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.
- 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 (% 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.
- 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 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.
- 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 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.
- 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.
- 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.
- 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
- 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.
3. Potential Growth Rate
- 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).
- 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.