20131008-大华银行-Economy_Expected_To_Pick_Up_Momentum_35页_376kb

South Korea Economic Summary (2011-2014)

Core Economic Projections

Main Economic Trends and Outlook

GDP Growth

• Economic growth in South Korea improved in the second quarter, reaching 2.3% y/y from 1.5% in the previous two quarters.
• The growth is expected to accelerate in the second half of 2013, reaching 3.5–4.0% y/y, with a full-year growth rate of around 2.9%.
• In 2014, GDP growth is projected to rise further to 3.9% y/y.

Key Drivers of Growth

• Private consumption and export recovery, particularly in the semiconductor and mobile phone sectors, are expected to drive growth.
• Government expenditure also contributed to the improved growth in the second quarter.
• However, fixed investment remained weak, with a contraction for the fifth consecutive quarter.

Challenges

• The depressed real estate market in Seoul, which continued to decline for 18 months in August, is expected to hinder a quick recovery in construction investments.
• Weak domestic demand and soft global demand pose challenges, particularly in the manufacturing sector, where the HSBC Manufacturing PMI has been in contraction since June 2013.
• China, the US, and the EU showed some recovery in demand, but Japan remained a weak point.

Monetary Policy Outlook

• The Bank of Korea has been easing monetary policy since mid-2012, with the last rate cut in May 2013, reducing the base rate to 2.50%.
• The central bank is expected to maintain a steady interest rate in the fourth quarter of 2013 before gradually normalizing rates in 2014.
• Low domestic inflation (slipping to a 13-year low) provides policy leeway, supporting the accommodative stance.
• CPI is expected to average 1.3% y/y in 2013 and rise to 1.9% y/y in 2014.

Current Account and Currency Outlook

• South Korea has maintained a strong current account surplus, which has boosted the KRW.
• The current account surplus is expected to increase to 4.8% of GDP in 2013 from 3.8% in 2012.
• Despite this, the expected rise in domestic consumption in 2014 may lead to a narrowing of the current account surplus due to increased imports.
• The strong current account position has helped cap the upside of USD/KRW, especially with the US Fed delaying QE tapering.
• However, the pair is still expected to be biased higher in 2014 due to the broad USD-strength environment.

Fiscal Policy and Risks

• The fiscal stance remains accommodative, with the government's deficit target at 1.8% of GDP, similar to 2013.
• A revenue shortfall is a key risk, driven by weak performance from property-related transactions and income taxes.
• There will be limited room for additional government spending even if growth recovery is delayed.

Household Debt Concerns

• South Korea faces high household debt, with annual growth in household debt nearly double income growth (11.7%) between 1999 and 2012.
• The household debt-to-GDP ratio reached 81%, raising concerns about consumer over-leveraging.
• While the loose monetary policy supports recovery in the real estate market and broader economy, over-leveraging in the consumer sector is a growing issue.

Conclusion

South Korea's economy is expected to pick up momentum in the second half of 2013, driven by private consumption and export recovery, despite a weak start to the year. The central bank will continue to prioritize growth and maintain a steady interest rate in the short term. The strong current account surplus and low inflation provide policy flexibility, but household debt and domestic consumption risks remain important concerns. The KRW is expected to benefit from the strong current account and global demand recovery, though it may face pressure from USD strength in 2014.