We maintain Korea’s GDP growth for 2018 at 2.8% but nevertheless are wary of downside risks. Korea’s economy has shown a mixed performance so far in 2018. While hard data remains strong, business sentiment and growth prospects for H2 will likely be affected by the US-China trade dispute and a slowdown in investment. Although exports remain strong thanks to global demand for semiconductors and high-value IT products, the growth momentum has softened this year. Exports grew 10.3% y/y in the first three months of 2018, slower than the 14.6% expansion in the same period last year. We see a risk of a greater slowdown if trade tensions escalate further, as exports account for c.60% of Korea’s GDP.
We believe the latest agreements among the US, North and South Korea towards dialogue are different from the past and could be the first step towards a peaceful resolution of geopolitical tensions. While planned summit meetings with North Korea are boosting sentiment and have important long-term implications, their short-term economic impact is likely to be limited. We see fresh risks to South Korea’s economy, including US tariffs; the negative impact of the minimum wage hike on the job market, particularly at the low-income level; and restructuring in the shipbuilding and auto sectors. Korea also faces structural issues such as high household debt, a housing bubble in some areas, and the risk of sudden capital outflows given that Korea’s base interest rate is lower than the Fed funds rate.
Inflation has remained benign, at just 1.3% in Q1, indicating that the Korean economy is not heating up. Private consumption as a share of GDP declined last year due to an aging population and a depressed job market. The government’s income-led growth strategy is at an early stage and has not yet boosted consumer confidence. Given subdued consumption, we do not see an inflationary risk of from demand end, and we expect a limited increase in inflation in 2018. We revise down our 2018 average CPI inflation forecast to 1.7% from 1.9% to reflect lower-than-expected recent readings.
Given weak inflation and a strong Korean won, we expect the Bank of Korea (BoK) to maintain its dovish stance for now and hike policy rates only in July. At the previous Monetary Policy Committee (MPC) meeting in February, policy makers questioned whether a hike was warranted with inflation so low. The BoK is unlikely to turn more hawkish in the near term given mixed recent macroeconomic data and upcoming local elections in June. We think Governor Lee is likely to avoid premature tightening amid ongoing trade uncertainty considering South Korea’s high dependence on exports and related manufacturing sectors. 【The contributions from outside analysts are unrelated to the views of the publisher. They have been contributed in English and the wordings have been mildly edited.】
By Head of SC Bank Korea Economic Research, Park Chong Hoon
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