The economic recovery that began in 2013 is expected to continue in 2014. Exports will benefit from the rebound in activity in the United States while domestic demand will be driven by public policies designed to stimulate the economy. Even so, risks persist: South Korea is still dependent on world growth and, while it has sharply reduced its external financial vulnerability over the past five years, economic growth is now constrained by domestic risks (household debt, public sector debt, aging population). The government has recently announced an economic strategy to reduce internal imbalances, which should help maintain investor confidence.
Economic growth accelerates…
South Korea’s economic recovery began in 2013 and is expected to continue in 2014. Real GDP growth accelerated to 2.8% in 2013 from 2% in 2012. This rebound conforms to South Korea’s traditional growth model: export-driven growth (55% of GDP) and a strong State presence. In 2013, public support was mainly comprised of the concentration of 70% of annual spending in the first half of the year, and a fiscal stimulus in May equivalent to 1% of GDP. The government initially planned to balance the budget in 2013, but this target has been postponed until 2017. Even so, the deficit is still mild at 1.8% of GDP, compared to 1.4% in 2012. Moreover, the central bank has lowered its key rate on three occasions between July 2012 and May 2013.
In keeping with the upturn in exports, domestic demand has picked up and accelerated strongly in Q4. After contracting for two years, investment rose at an average rate of 3.5% in 2013, fuelled by the rebound in exports and public stimulus policies. The construction sector reported 3.7% growth after three years of decline, reflecting the levelling off of the real-estate market. Despite public support, however, household consumption barely accelerated to 1.9%, from 1.7% in 2012, restrained by the high level of household debt (160% of GDP).
■ …but the recovery will be mild
The statistics available for the first two months of the year do not suggest a strong acceleration in Q1. Like in the other countries of northern Asia (China and Taiwan), export growth was not very strong in the first two months (averaging 0.7% y/y, after an average of 4.8% in Q4 2013), while imports rose 1.4% (2.5% in Q4 2013). In keeping with the strong increase in the order book component for the fourth consecutive month in March, we expect South Korean exports to steadily accelerate throughout the year, once seasonal and/or temporary effects have dissipated (Chinese New Year and harsh winter weather in the United States).
BY Hélène DROUOT
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