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REPUBLIC OF SOUTH KOREA

The IMF had indicated that after a strong rebound in 2010 that the South Korean (Korea(n)) economy had moderated in 2010 and into 2012 in line with global developments. This is a reflection of the weakening global economic outlook, with growth in Korea likely to be weaker than the baseline figure of 3.5% in the IMF forecast with an expected reduction of a quarter percent.   Expectations are that activity in the second half of 2012 would-be expected to expand at a moderate pace supported by Korea’s strong export sector and a recently concluded EU and USA free trade agreements. Domestically there was an expectation of recovery in the facilities s investment with strong consumption growth boosted by increased wages growth.

This outlook however is subject to substantial uncertainty. The main concern being spillovers from intensification of the crisis in Europe to China and the USA.

Fiscal Policy

Korea has a long standing commitement to fiscal prudence which provides room for strong fiscal response if needed and has every intention to increase social spending with a strong focus on the welfare of the lower income groups.

Korea is facing higher social spending, rapid population ageing and potential costs related to geopolitical events which means integration of long term issues mores systematically into the fiscal policy framework remains an important priority.

Monetary Policy

The stance here is still accommodating against global weakness’s and uncertainty. If growth does strengthen from its current moderation then it is possible that there may be some increase in the policy rate in early 2013 to ensure inflation remains within the target range. If the economy does weaken then the Bank of Korea has space to cut rates.

Recent developments

Figures released by Reuters on August 1, 2012 have indicated exports in July have suffered the worst showing in three years. The economy is export reliant and the effects of the Euro crisis have meant substantial shrinkage has taken place in the manufacturing sector. The fourth largest economy is losing momentum and this may result in a further interest rate cut in early August. The Korean central bank had cut the base rate for the first time in 3 years, the following day the Central Bank lowered this year’s economic growth outlook.

Korea also is suffering from falling home prices impacting capital gains which is hurting overall business activity in the property sector and this in turn is further squeezing household spending.

Inflation has dived to a twelve year low of 1.3% as a result of uncertainty in the world economy and exports have fallen 8.8% in July.

The data released on the 1 August 2012 has reinforced the view that policy makers would become more aggressive in trying to stop the economy from slipping into a deeper slump, and this may include further interest rate cuts.

Source: Selected IMF and Reuters data

 

 

John Brooks

Trade Economist

8/8/2012