South Korea Economy Resilient Despite Turmoil

Despite recent geopolitical tensions in the Korean Peninsula and internal political turmoil, South Korea’s economic fundamentals have been surprising resilient. The GDP advanced the most in 1-1/2 years in the first three months of 2017, beating expectations, boosted by exports and investment as the stability of the Won and outperforming stock market continues to attract foreign investors. Also, the additional boost is expected to come from consumer spending as newly elected president Moon Jae-In promised a 10 Trillion Won stimulus plan to foster job creation, support startups, small and medium businesses.

The GDP expanded 1.1 percent on quarter in Q1 2017, above an initial estimate of 0.9 percent. It is the strongest growth rate since Q3 2015, mainly driven by foreign demand, fixed investment, namely machinery and construction investment, namely residential building construction. Year-on-year, the economy expanded 2.9 percent, faster than an initial estimate of 2.7 percent and 2.4 percent in the previous quarter. The central bank sees growth at 2.6 percent in 2017 while the government said it could exceed the 2.8 percent in 2016.

Exports have been growing by double digits since January of 2017 amid improving external demand. In May, sales jumped 13.4 percent year-on-year to USD 45 billion after growing 24.1 percent in April, the most in almost 6 years, boosted by semi-conductors, petroleum products and flat screens. Yet, tensions between South Korea and its top trading partners could undermine further expansion. Trade with China, especially that of car sales, continued to suffer in Q1 2017 and the tourism industry faced the biggest setback in ten years, following Chinese government restrictions prompted by a decision by South Korea to house THAAD missile defense system. In addition, there are fears that exports to US may be reduced as President Trump already named the South Korea-United States Free Trade Agreement unfair. The trade ministry said he is aiming to diversify South Korea's export destinations to reduce reliance on markets such as the United States and China, given persistent downside risks. 

Business confidence has been recovering since the beginning of 2017 amid rising hopes that the new president would reform the labour marketa and the big family-controlled conglomerates that dominate the economy. The Business Survey Index (BSI) in the manufacturing sector reached nearly three-year high in May. And although industrial and manufacturing output grew the least in 3 months in April, the slowdown was due to short-term factors associated with the launch of Samsung Electronic's new line of phones. 

Also, consumer confidence has been improving. The index rose sharply in May, reaching the highest level since April of 2014 as the new president took office promising more government spending to create jobs. So far, the unemployment rate remained stable from 3.5 to 4 percent since 2014, but the downturn in the manufacturing sector may lead to tens of thousands of jobs looses as companies restructure their businesses. Also, the youth unemployment rate has been steady rising and remained above 10 percent in three months to April. President Moon has pleadged to refor the labor market by discouraging contract jobs, increasing the minimum wage and reducing working hours. The new administration also promised to create 810,000 public sector jobs and subsidize living expenses for the youth during job searches. 

On the price front, the inflation rate has been rising since the beginning of 2017 amid higher oil prices. It reached the central bank target of 2 percent in April and policymakers expect the inflation to be 1.9 percent in 2017. As a result, the Bank of Korea held its key rate at a record low of 1.25 percent in May and no changes in monetary policy are expected this year.  

Charles |
6/3/2017 2:10:50 PM