South Korea’s economic outlook likely to rebound slowly in coming quarters

In Q4 2015, South Korea’s economy had grown 0.7% q/q and 3.1% y/y. Domestic demand continues to be strong, but the economic growth is being weighed on by net exports. However, the economic outlook is expected to rebound slowly in the coming quarters, but will continue to feel the negative impact from sluggish global trade, according to Scotiabank.

“We expect that the nation’s real GDP growth will average 2.9% y/y over the next two years, following a 2.6% gain in 2015”, added Scotiabank.

Weaker demand from China, South Korea’s key export market, and increased competition from China’s manufacturers will be a headwind for South Korean exporters. Authorities’ monetary and fiscal stimulus measures support consumer spending; however, increased consumer debt burden will slightly limit private consumption growth. South Korea’s economic activity will also get important support from government spending.

Meanwhile, the country’s monetary conditions will continue to support economic activity. According to Scotiabank, Bank of Korea is expected to implement monetary stimulus in Q2 2016. The central bank has maintained key interest rate at 1.5% since June 2015. Moreover, the BoK is likely to closely observe certain developments while setting its policy stance: China’s economic and financial conditions, geopolitics risks, monetary policy direction of major economies, South Korea’s rising household debt burden and international capital flow dynamics. South Korea’s outlook for inflation continues to be manageable. Headline inflation rate in February had reached 1.3% y/y.

“We expect to see a modest pick-up in price pressures over the coming months and the annual inflation rate will likely reach around 1⅔% by the end of the year, remaining below the BoK’s 2% inflation target for 2016-18”, says Scotiabank.

The country’s public sector finances continue to be strong with a balanced budget expected to be recorded through 2017, added Scotiabank. The South Korean government continues to keep an expansionary fiscal policy stance to help economic growth. Meanwhile, the country’s external accounts were boosted by smaller oil import bill, countering the weak performance of the export sector.

“The nation’s current account surplus will remain sizable, averaging close to 7½% of GDP in 2016-17”, noted Scotiabank.