South Korea: Growing close to potential

Country Report

Reduced political uncertainties and rising exports improve the outlook

Economic growth is set to prove firm in 2017 at +2.8%. Exports should gather pace in line with higher global demand. The last presidential election helped to stabilize the political situation and confidence is slowly recovering. The policy-mix would remain accommodative to help consolidate growth momentum through a rise in investment.  Private consumption growth should pick up speed but at a gradual pace, limited by a high household debt (96% GDP).

Risks to our baseline scenario stem from both domestic and external sources. Domestically, reducing households leverage and addressing property market imbalances will be crucial for creating a sustainable and safe growth environment. Externally, economic risks include slower global trade growth and downward pressures on the currency following a rise in policy rate in the US. Politically, tensions with North Korea and with China are still a matter of concern. Relations with the latter deteriorate as South Korea agreed on deploying the US Terminal High Altitude Area Defence (THAAD) anti-missile system on its soil. This has resulted in unofficial economic sanctions from Beijing such as the boycott of Korean cosmetics or TV shows.