Korea's Economic Outlook in Six Charts
IMF News, May 21, 2019
Source details
- Canonical URL
- Korea's Economic Outlook in Six Charts
Other formats
Bibliographic details
- Published: May 21, 2019
Overview and recent performance
- Korea is the 11th largest economy in the world and its per capita income has recently passed the $30,000 mark.
- With strong fundamentals, Korea’s economy has performed well in recent years, but short-term growth is moderating and long-term growth faces headwinds.
- Growth: GDP growth dropped to 2.7 percent in 2018 from 3.1 percent in 2017.
- Key contemporary headwinds: global trade slowdown (particularly for semi-conductors), trade tensions, and China’s slowdown.
Short-term cyclical developments
- Investment and exports weakened recently; consumption is being supported by fiscal policy.
- Export growth is deteriorating on the back of trade tensions and China’s slowdown.
- Inflation pressures are weak and job creation has been tepid.
- Household leverage keeps increasing, albeit at a slower pace, raising concerns about financial risk.
Policy stance and near-term recommendations
- Fiscal policy:
- An easing of fiscal policy in the short term would help support economic growth and contain risks.
- The 2019 budget envisages an increase in government spending and the proposed supplementary budget is expected to further support economic activity.
- Fiscal policy should remain expansionary in the medium term, focusing on increasing social protection, boosting female labor force participation, and supporting growth-enhancing reforms in product and labor markets.
- Fiscal space: Korea has substantial fiscal space to aim for a zero structural balance in the medium term without risking debt sustainability.
- Public sector job creation should be linked to developing services that cannot be provided by the private sector.
- Monetary policy:
- Monetary policy should be eased, as inflation is projected to remain below the target for this year and next, inflationary pressures are weak, signs are emerging that inflation expectations have started to decline, and the output gap is negative.
Structural and medium-to-long-term challenges
- Potential growth is declining due to unfavorable demographics and slowing productivity.
- The banking sector appears to be well capitalized with sizable liquidity buffers.
- Household leverage increase remains a financial stability concern.
Structural reforms and labor market policy
- Adopt "flexicurity" as the basis for labor market policies:
- Principle: protect the worker not the job.
- Three pillars: more flexibility for regular workers; a strong and inclusive safety net; and active labor market policies.
- Continue efforts to encourage the participation and leadership of women in the labor market.
- Deregulation to boost long-term growth:
- Examples: government initiative to create regulatory sandboxes is useful.
- Policy measures: lower barriers to entry, reduce regulatory protection of incumbents, and reduce price controls.
Source: Korea's Economic Outlook in Six Charts (May 21, 2019), IMF