major macro economic indicators
|2018||2019||2020 (e)||2021 (f)|
|GDP growth (%)||2.7||2.7||-1.0||3.0|
|Inflation (yearly average, %)||1.5||0.4||0.3||0.4|
|Budget balance (% GDP)||2.6||0.4||-3.2||-4.2|
|Current account balance (% GDP)||4.5||3.6||3.3||3.4|
|Public debt (% GDP)||40.0||41.9||48.4||52.2|
(e): Estimate (f): Forecast
- Diversified industrial base
- Leader in high-end electronics
- High private and public R&D spending
- Good educational system
- Diversified FDIs in Asia
- Competition from China (steel, shipbuilding, electronics)
- High level of household debt
- Ageing population
- High youth unemployment
- Net commodity importer
- Overrepresentation of chaebols in the economy
- Proximity to North Korea
- Increasing tensions with Japan
Growth set to rebound despite downside risks
Growth is set to recover gradually through 2021, on the back of a revival in private consumption supported by fiscal stimulus measures, although exports (40% of GDP) should remain modest. A steady recovery in key trade partner China (25% of exports), and semiconductors (17% of exports), have been driving external demand. That said, the recent U.S. curbs on China’s technology might add downside pressures, alongside decreasing semiconductor prices in recent years. The four supplementary budgets (3.6% GDP) passed in 2020 should bolster business and consumer sentiments, and result in the revival of private consumption (46% of GDP), although a rising unemployment rate (3.9% in September 2020 compared to 3.4% for the same period in 2019) and high household debt (97.8% of GDP in 2020) might constrain it to some extent. Investment should remain subdued following disruptions in domestic activity and a weaker growth outlook. Inflation should rebound and edge up closer to the BOK (Bank of Korea) 2% target range, but will be unlikely to reach it despite a recovery in domestic demand. After two 25bps rate cuts in 2020, the BOK should not lower the policy rate any further in order to avoid spurring households’ debts (which have already reached high levels), leaving the recovery to rely only on fiscal stimulus measures, which would further dig the budget deficit.
The budget deficit will widen for the second consecutive year
The budget deficit will widen due to expansionary moves that will be extended through 2021 in order to support an economy damaged by the pandemic. The government drafted a record USD 469.9 billion fiscal budget for 2021, marking the second consecutive year where expenditures exceed revenues. Considering the increasing unemployment rate, the budget would mainly focus on health, welfare and employment (30.5% of budget expenditures), and on job creation (5.5%), as President Moon Jae-in pledged to expand public sector jobs before the end of his term in 2022. Public debt is set to deepen in 2021 and would be partially financed through government bonds issuance. The government plans to sell 172.9 trillion won of bonds in 2021 (167 trillion in 2020).
The current account balance should remain positive, as the trade surplus will probably widen in 2021. While the slump in import demand is partially offset by fiscal stimulus measures, exports will be driven by the recovery in China. Given that international borders will remain closed into the first half of 2021, the tourism balance deficit (due to the number of Koreans visiting abroad exceeding that of foreign visitors) should diminish, which in turn would widen the current account surplus. The economy should continue to sit on comfortable foreign exchange reserves, which stood at 10.4 months of imports in September 2020.
No major improvements with its neighbours
President Moon Jae-in’s ruling Democratic Party secured a majority in the Parliamentary elections in April 2020, with a strong public support for its management of the COVID-19 pandemic. The left-leaning ruling party could push its reform agenda before the presidential elections in 2022, particularly regarding unemployment and reforming chaebols – which consists in reducing conglomerates’ dominance on the economy. Relations with neighbours do not seem to get any better so far. Increasing tensions recently led Pyongyang to blow up the joint liaison office with Seoul near Kaesong (North Korea). It is unlikely that Japan and South Korea’s ongoing trade conflict - with South Korea requesting reparations from Japan for crimes committed during the Second World War - could ease under the new Japanese Prime Minister Suga, who inherited Abe’s policy line.
Last updated: February 2021