This report focuses on the current situation of Korea’s domestic economy experiencing low growth and the economic outlook update for 2013. During Q1 of 2013, Korea’s domestic economy grew by 0.9% compared to the previous quarter and by 1.5% compared to the previous year. Throughout 2013, Korea’s domestic economy is projected to see low growth, falling short of its potential growth rate estimated of 3.6%. Korea’s export conditions are expected to pick up at a slow pace with import demand from advanced countries decreasing due to continued efforts to achieve debt restructuring and financial soundness as well as the yen weakening due to Abenomics.
    The Korean domestic economy is projected to grow by 2.8% in 2013, a 0.8%p increase from 2.0% in the previous year. Export conditions are expected to improve with the volatility of the international financial market eased and world trade volume recovered, while domestic demand is anticipated to accelerate, albeit gradually. The Korean government’s policy package to bolster the housing market (announced on April 1) and revised supplementary budget allocations (announced on April 16) are also expected to serve as a stimulus to further promote this trend. At the same time, low growth, which falls far short of the potential growth rate (estimated at 3.6% for 2013), is anticipated to last and result in the pace of economic recovery being more sluggish than witnessed during the past periods of economic recovery. Low economic growth is expected to persist with the annual average economic grow rate remaining at 3.6% from 2013 to 2015. Medium term, the prospect for the improvement in export conditions is not quite promising due to the prolonged Eurozone crisis, the slowed growth of the Chinese economy, low growth of the US economy, and the yen depreciation, while it is difficult to forecast drastic consumer spending growth domestically due to the slowdown in the creation of jobs and the real estate crunch. As the global economy has not been logging stable growth recently, it is crucial to brace for a possible downswing in the world’s trading environment by reinforcing export competitiveness and actively seeking balanced growth of exports and consumer spending. The Bank of Korea also needs to come up with monetary easing programs, which fall in line with the government’s expansionary fiscal policy. It is desirable to push ahead with monetary easing, including interest rate cuts, as price pressure remains low in the mid-term. However, it must be kept in mind that monetary easing may increase macro-prudential risk (such as the increased burden of household debt). In addition, the target inflation rate serves as the platform, upon which expected inflation is formed; therefore, it must be noted that a target set higher than actual inflation, as witnessed now, is likely to spur expected inflation. Also, it is necessary to make preparations in advance for a possible increase in exchange rate fluctuations incurred by the US government’s interest rate hikes around 2015. Lastly, housing market measures must be aimed at boosting home sales and refrain from providing excessive financial aid.

Won Dongah