Uncertainties about the South Korean economic prospects continue to be high due to challenges faced by the automotive, smartphone and shipping industries, noted Scotiabank in a research note. South Korea’s export sector continues to be impacted by subdued global trade. Furthermore, the nation continues to be affected by developments seen in China.
South Korea’s export sector is quite reliant on demand from China as it ships more than one fourth of its exports to China. Also, the South Korean economy is amongst the most exposed regional economies to the decelerating investment growth in China.
Furthermore, rise in competition from China’s manufacturers would continue to create challenges for South Korean exporters. Within this environment, domestic demand mainly underpins economic activity. Consumer spending is supported by authorities’ fiscal and monetary stimulus measures, though an increased household debt burden would constrain private consumption growth slightly.
Government spending is expected to give important support to the South Korean economic activity. Real economic growth in the September quarter decelerated to 2.7 percent from the average pace of 3 percent registered in the first half of 2016.
“We expect South Korea’s output to expand by 2.7 percent y/y in 2016 as a whole, followed by a pickup to 2.9 percent y/y in 2017-18 that reflects a modest export sector recovery”, added Scotiabank.
Meanwhile, the Bank of Korea is expected to continue with an accommodative monetary policy stance for a longer period of time. With the ongoing economic challenges and below-target inflation, the Korean central bank is likely to further cut the benchmark interest rate in the months ahead, taking the key rate from the current level of 1.25 percent to 1 percent, according to Scotiabank.
The central bank recently lowered its key interest rate in June 2016. South Korea’s consumer price inflation is contained with the headline rate at 1.3 percent year-on-year in October, continuing to stay below the central bank’s 2 percent inflation target for 2016-2018. Inflation is expected to close this year near the current level and come close to the 2 percent mark next year, stated Scotiabank.
