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PRESS RELEASE

January 24, 2019 Research Department

Economic Outlook for 2019

Summary

The Korean economy is projected to grow by 2.6 percent in both 2019 and 2020. It is expected to continue its steady pace driven by consumption and exports, amid expansionary fiscal policy stance. Private consumption will grow moderately thanks to the government’s income support policies, although the rate of its growth will decline a bit due to the slowing pace of increase in household income and sluggishness of consumer sentiments. Facilities investment is foreseen rebounding this year, led mainly by a recovery of demand in the semiconductor industry. Construction investment is expected to continue to decline through 2020, affected by the slumps in new orders and housing construction starts. The pace of growth in goods exports is expected to be lower than that of last year, under the impacts of the weakening global economic growth and global trade conflict. In 2020, the Korean economy will grow at the same rate as in 2019 thanks to the lessening extent of decline of construction investment, although the pace of increase in fiscal expenditure will slow. It is forecast that consumer prices will rise by 1.4 percent in 2019 and by 1.6 percent in 2020. Although the hikes in wages will cause service prices to rise the inflationary pressures on the demand side will not be strong, while the effects of global factors such as falling international oil prices will work as downward pressures. Thus, a modest rate of consumer price inflation is expected this year. Consumer prices are projected to increase at a moderate pace next year also, as downward pressures due to the expansion of free education provision and the stabilization of leasehold deposit and monthly rental prices will continue.

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I. ECONOMIC CONDITIONS

Ⅰ-1. Recent Developments in Domestic Economy *

It is assessed that private consumption has continued its sound growth overall, despite

the ongoing adjustments of facilities and construction investment. The pace of private

consumption growth accelerated during the fourth quarter of last year, driven by

consumption of services. Facilities investment continued its adjustment, especially in

connection with machinery, owing to concerns about the slowdown in the semiconductor

industry. Construction investment showed continuing adjustments as well, as the

quantity of construction decreased in line with sluggishness in new construction starts.

The pace of increase in external trade slowed. The extent of export growth lessened, due

to the plunge in international oil prices and to a decline in semiconductor prices. The

increase in raw material imports slowed as well, owing to the collapse of international

oil prices, while imports of capital goods sustained their downward path as a result of

factors such as delays in semiconductor investment.

The growth in employment picked up moderately in the fourth quarter, affected largely

by reduced extents of decline in employment in the business services and wholesale &

retail trade service sectors. The unemployment rate (seasonally adjusted) was 3.8% – 0.2

percentage point lower than in the previous quarter.

Consumer price index inflation rose a bit from 1.6 percent in the third quarter to 1.8

percent in the fourth, owing mainly to a continuing pickup in prices of agricultural and

marine products and to the end of the cut in electricity fees by the government. Core

inflation with food and energy prices excluded remained at 1.1 percent in the second half

of last year.

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Ⅰ-2. Global Economy

It is forecast that the global economy will sustain growth at the level of its potential

growth rate, although the pace of growth will slow as growth in advanced economies

weakens.

It is forecast that, despite the weakening of its growth momentum, the United States will

maintain a growth rate exceeding its potential level. It is estimated that growth slowed

somewhat in the fourth quarter last year, as the effects of the government’s expansionary

fiscal policies weakened and the degree of monetary policy accommodation lessened.

Growth will gradually decrease in the future also, but is expected to exceed its potential

rate until next year, thanks to improvements in income resulting from the favorable

employment conditions and to robust consumer sentiments for example.

It is forecast that growth in the euro area will slow slightly to the potential growth rate

level. The euro area economy showed a somewhat inadequate recovery in the fourth

quarter of last year, after having recorded growth of just 0.2% in the third quarter. This

was due in part to the continuing sluggishness of industrial production in consequence

of the regulation of vehicle emissions and of poor weather conditions. It is expected

going forward that growth will decline slightly but recover to a rate at its potential level,

thanks to improvements in employment conditions and to the accommodative financial

conditions.

Economic activities in Japan are expected to maintain robust growth. In the fourth

quarter of last year most economic indicators including exports recovered from their

negative growth of the quarter before. It is forecast that the Japanese economy will

continue to grow at a rate near its potential level. The Japanese government plans to

increase its fiscal expenditures for disaster recovery and for alleviating the impacts of

the consumption tax rate increase.

The Chinese economy is expected to continue to slow, although growth should remain

in the lower-6% range. The paces of increase in exports and consumption slowed in the

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fourth quarter of last year, in line in part with the trade dispute with the United States.

Corporate profitability has declined and the negative perceptions of the economy have

expanded. Despite the downside pressures on growth, it is expected that China will

maintain growth at the lower-6% level going forward, supported by its active

expansionary fiscal policies.

India is foreseen sustaining its robust growth, supported by government expenditures

and by investment. The ASEAN-5 countries are also expected to maintain stable growth,

although the paces of growth in their exports will slow slightly.

It is forecast that the growth in global trade will gradually slow. The growth rate fell in

2018, on the base effect from the large increase during the year before and the reduced

demands for imports related to investment in advanced economies. The rate of global

trade growth is expected to gradually slow as the momentum of the global economy

weakens and the impacts of the global trade conflicts spread.

International oil prices rebounded slightly to the $60 level in the early part of this year,

after having declined from November of last year due to an increase in the quantity of

oil supply and to heightened concerns about a global economic slowdown.

Table 1. Basic Assumptions of Economic Forecasts 2018 e 2019 e 2020 e H1 e H2 e Year e

World economic growth (%)1 3.7 3.6 3.5 3.5 3.5 United States 2.9 2.9 2.2 2.5 2.0 Euro area 1.9 1.3 1.8 1.6 1.6 Japan 0.9 1.0 0.8 0.9 0.6 China 6.6 6.2 6.1 6.2 6.1

World trade growth (%)1 3.9 3.7 3.6 3.7 3.6

Oil import unit price (US dollars per barrel)2 71 64 64 64 63

Non-fuel commodity price (%)1 2.8 - - 0.2 0.3 Notes: 1. Year-on-year rates of change.

2. Proportions of oil imports (period average, CIF basis): 80% from Middle East, 20% from other regions.

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II. ECONOMIC OUTLOOK

Ⅱ-1. Economic Growth

Private consumption will continue to grow moderately, although the rate of its growth

will be lower than last year’s. The trend of increase in household incomes will slow,

due to a decline in the rate of nominal wage growth. Consumer sentiments are

unlikely to improve significantly in the short term, because of concerns about the

economic slowdown and the uncertainties about the US-China trade dispute.

However, the increase in transfer payments by the government and the stabilization

of housing prices will support moderate growth in private consumption, by

strengthening the household income base and expanding the capacity for

consumption.

Facilities investment is foreseen rebounding this year. IT investment is expected to

undergo an adjustment in the first half, but to then improve in the second half led

mainly by a recovery of demand in the semiconductor industry. Investment in the

non-IT sector is expected to maintain its year-ago level, with the amounts of new

investment varying across the different industries.

Intellectual property products investment will sustain its moderate growth. R&D

investment is foreseen continuing to grow solidly, thanks to the expansions in tax

benefits and in the government’s R&D budget as well as the continuing growth in

corporate sales. Other intellectual property products investment is expected to

gradually recover, due to increased demand for new technology-based software and

to the government’s support for smart factory development.

Construction investment is expected to continue to decline. The pace of decline in

residential building construction is foreseen picking up greatly, as the negative effects

of the slump in new housing construction starts and the decline in new housing orders

during 2017 and 2018 continue. Non-residential building construction, especially of

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commercial buildings and offices, is expected to be sluggish, although the extent of

its decline should gradually lessen. Civil engineering investment is expected to

recover slightly from its slump, as the central government expands the size of its SOC

budget and public corporations increase their investments.

Goods exports are expected to grow more slowly than last year. In volume terms they

will continue their robust pace of increase, although declines in their per-unit prices

will lead to a slight drop in their value.

The Korean economy will grow by 2.6 percent in both 2019 and 2020. It is expected

to continue its steady pace of growth, driven mainly by increases in consumption and

exports amid the operation of expansionary fiscal policies. The contraction in

construction investment will however continue through 2020, which will work to

constrain economic growth somewhat.

Table 2. Economic Growth Forecasts

(year-on-year, percent) 2018 2019e 2020 e

H1 H2 e year e H1 H2 Year Year

GDP 2.8 2.5 2.7 2.5 2.8 2.6 2.6

Private consumption 3.2 2.5 2.8 2.5 2.7 2.6 2.6

Facilities investment 1.9 -5.3 -1.7 -2.1 6.3 2.0 2.3

Intellectual property products investment 2.8 1.2 2.0 2.2 2.9 2.5 2.8

Construction investment -0.1 -7.4 -4.0 -6.1 -0.5 -3.2 -2.0

Goods exports 2.8 4.9 3.9 2.4 3.8 3.1 3.0

Goods imports 2.5 0.9 1.7 0.6 4.0 2.3 2.5

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The net contribution of domestic demand to GDP growth is foreseen rising slightly

(1.4%p in 2018 → 1.5%p in 2019), while that of export will fall (1.3%p → 1.1%p).

Over the growth outlook, there is a high level of uncertainty.

The upside risks to growth include those of (1) a resolution of uncertainties thanks to

a trade deal between the US and China, (2) an improvement in domestic demand

conditions led by the government’s expansionary fiscal policies, and (3) an increase in

corporate investment in consequence of the government’s economic stimulus measures.

Among the downside risks are (1) a slowdown in the pace of growth in exports due to

a deepening of the US-China trade dispute, (2) a weakening of global economic growth

in line mainly with slowdowns in some major countries such as the euro area and China,

and (3) a contraction in global semiconductor demand.

Figure 1. GDP Forecast Figure 2. Fan Chart for GDP Projection

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Ⅱ-2. Employment

It is forecast that labor market conditions will improve at a moderate pace in 2019.

The growth in employment is expected to be driven by service sector employment,

owing mainly to the government measures to support employment growth and to the

gradual recovery in the number of foreign tourists. The decline in employment in the

manufacturing sector is forecast to continue, however, due in part to the slowdown in

the IT industry.

As a result of all of this, the number of persons employed is expected to increase by

140 thousand during 2019, and by 170 thousand in 2020. The unemployment rate is

projected to remain at 3.8 percent in 2019, and to fall slightly to 3.7 percent in 2020

Table 3. Employment Forecasts

(ten thousand persons, percent)

2018 2019e 2020 e H1 H2 year H1 H2 year year

Changes in number of persons employed1 14 5 10 9 18 14 17

Unemployment rate 4.1 3.6 3.8 4.2 3.4 3.8 3.7

(S.A.) 3.8 3.9 - 3.9 3.8 -

Employment-to-population ratio2 60.4 61.0 60.7 60.3 61.1 60.7 60.8

(aged 15 to 64, OECD basis) [66.5] [66.8] [66.6] [66.7] [67.1] [66.9] [67.2] Notes: 1. Year-on-year changes

2. 15 years of age & above

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Ⅱ-3. Prices

Consumer prices are forecast to increase by 1.4 percent in 2019 and by 1.6 percent in

2020. Although demand-side inflationary pressures will continue due to the increases

in wages, especially in the service sector, the effects of global factors such as the

decline in international oil prices will limit the rise in consumer prices. The increase

in import prices is also expected to weaken, due to the lower prices of international

oil than last year and to the tighter global economic conditions. Given the slightly

negative GDP gap, the demand-side inflationary pressures are not expected to be

strong. Core inflation (CPI excluding food and energy product prices) is expected to

show a level of 1.5 in both 2019 and 2020.

There is again a mix of both upside and downside risks to the inflation path.

The possible upside risks include (1) a gradual buildup of domestic cost pressures due

to the continuing increase in wages, and (2) improvements in domestic demand

conditions driven by the government policies. Among the downside risks meanwhile

are those of (1) downward pressures on service prices in line with the expansion in

government welfare expenditures related to education and to medical treatment, and

(2) the possibility of a strengthening Won due to weakening expectations of interest

rate hikes by the US Federal Reserve and to an agreement in the US-China trade

negotiations.

Table 4. Inflation Forecasts (year-on-year, percent)

2018 2019e 2020e

H1 H2 year H1 H2 year year

Headline consumer price inflation 1.3 1.7 1.5 1.2 1.5 1.4

1.6

CPI excluding groceries and energy

(OECD core CPI) 1.3 1.1 1.2 1.2 1.5 1.4

1.5

CPI excluding agricultural products

and petroleum 1.2 1.1 1.2 1.3 1.6 1.5

1.5

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Ⅱ-4. Current Account Balance

The current account will remain in surplus, but it is forecast that the scale of the

surplus will narrow, led mainly by the goods account. The goods account is expected

to shrink even despite the drop in international oil prices, due to deteriorations in the

conditions for exporting of Korea’s major export items. As for the service account,

the travel and construction accounts will likely improve but the transport account will

continue its trend of deficit.

In consequence, it is forecast that the current account will record a surplus of around

69 billion dollars for 2019 and around 67 billion dollars in 2020, meaning that the

current account-to-GDP ratio will fall gradually from around 4 percent in 2019 to the

upper 3 percent range in 2020.

Table 5. Current Account Forecasts

(billion dollars)

2018 2019e 2020e

H1 H2 e year e H1 H2 year year

Current Account 29.7 45.4 75.0 23.0 46.0 69.0 67.0

Goods account 55.7 60.6 116.3 45.5 62.5 108.0 107.0

Services·Primary·Secondary income -26.0 -15.2 -41.2 -22.5 -16.5 -39.0 -40.0