131 … underpinned bysupportive monetaryconditions The economy is reboundingfrom a slowdown inlate2011… KOREA

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2. DEVELOPMENTS IN INDIVIDUAL OECD COUNTRIES

OECD ECONOMIC OUTLOOK, VOLUME 2012/1 © OECD 2012 – PRELIMINARY VERSION 131

KOREA

Following a slowdown in late 2011, output growth is projected to pick up gradually, led by a rebound in exports as world trade gains momentum. Stronger exports will in turn boost domestic demand, helping to achieve output growth of 4% in 2013. With higher oil prices, the current account surplus is expected to fall to around 1½ per cent of GDP.

As the economy picks up, the central bank will need to raise its policy interest rate from the current level of 3¼ per cent to keep inflation near the mid-point of its 2 to 4% target range. The government should pursue its target of a balanced budget (excluding the social security surplus) by 2013. Sustaining growth over the medium term requires reforms to boost labour force participation in the face of demographic headwinds and to enhance productivity, particularly in services.

The economy is rebounding from a slowdown in late 2011…

Output growth slowed in the second half of 2011, reflecting the deceleration in world trade and substantial terms-of-trade losses. Slower growth helped reduce inflation from 4% in 2011 to 3% (year-on-year) in the first quarter of 2012. The weakness in activity in late 2011 appears to be fading, particularly in the manufacturing sector, mirroring faster growth in world trade and an improvement in business confidence. Meanwhile, slower inflation is boosting households’ purchasing power.

… underpinned by supportive monetary conditions

The Bank of Korea has left its policy interest rate at 3¼ per cent since June 2011, keeping real interest rates close to zero. The relatively low value of the won has also kept monetary conditions relaxed. Despite some appreciation in the first quarter of 2012, the won remains about 25%

below its 2007 level in real effective terms. Growth has been restrained by fiscal consolidation as the government pursues its 2013 target of a balanced central government budget (excluding the social security surplus), helping to keep public debt below 35% of GDP. Consolidation is

Korea

1. Seasonally-adjusted for production and a three-month moving average for non-seasonally-adjusted exports.

Source: Statistics Korea, OECD Economic Outlook 91 database and Bank of Korea.

1 2 http://dx.doi.org/10.1787/888932608848 2006 2007 2008 2009 2010 2011

90 100 110 120 130 140 150 160 170 180 Index

2012 Manufacturing production

Exports

Exports have led the recovery Volume indices 2005 = 100¹

2006 2007 2008 2009 2010 2011 0

1 2 3 4 5 6

%

(3 ± 0.5%)

(3 ± 1%)

CPI inflation Core inflation

Medium-term inflation target range

2012 Inflation is back in the central bank’s target range

Year-on-year percentage change

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OECD ECONOMIC OUTLOOK, VOLUME 2012/1 © OECD 2012 – PRELIMINARY VERSION

132

being achieved by limiting spending growth to 3 percentage points below the projected increase in revenues.

Output growth is projected to accelerate to 4%

in 2013…

Export growth is projected to gain momentum as world trade picks up in 2012. Trade will also be stimulated by the front-loaded implementation of the Korea-US Free Trade Agreement beginning in 2012.

Given that exports are equivalent to more than one-half of the Korean economy, stronger exports are likely to boost fixed investment and support private consumption. Smaller terms-of-trade losses in 2012- 13 will also have less negative effects on income growth and domestic demand. This may help balance the economic expansion by boosting the service sector, which has been relatively stagnant thus far during the recovery from the 2008 global financial crisis.

… although there are a number of risks, both external and domestic

However, Korea faces external and domestic risks. On the external side, a stronger rebound in world trade could result in faster output growth in Korea. However, a deterioration in the euro area could weaken the global economy. Moreover, there is considerable uncertainty about growth in China, Korea’s major trading partner, and in other emerging 1 2 http://dx.doi.org/10.1787/888932610387

Korea: Demand, output and prices

2008 2009 2010 2011 2012 2013

Current prices

KRW trillion Percentage changes, volume (2005 prices)

GDP at market prices 1 026.5 0.3 6.3 3.6 3.3 4.0

Private consumption 561.6 0.0 4.4 2.3 2.6 3.5

Government consumption 156.9 5.6 2.9 2.1 4.0 3.0

Gross fixed capital formation 300.8 -1.0 5.8 -1.1 4.5 4.0

Final domestic demand 1 019.4 0.6 4.6 1.2 3.3 3.5

Stockbuilding¹ 19.2 -3.9 2.5 0.8 -0.2 0.0

Total domestic demand 1 038.5 -3.4 7.2 2.0 3.1 3.5 Exports of goods and services 544.1 -1.2 14.7 9.5 6.4 9.6 Imports of goods and services 556.2 -8.0 17.3 6.5 6.1 8.8

Net exports¹ - 12.1 3.7 -0.6 1.8 0.3 0.6

Memorandum items

GDP deflator _ 3.4 3.6 1.7 2.4 2.1

Consumer price index _ 2.8 2.9 4.0 3.0 3.0

Private consumption deflator _ 2.6 2.6 3.8 3.1 2.8

Unemployment rate _ 3.6 3.7 3.4 3.5 3.5

Household saving ratio² _ 4.6 4.3 3.1 2.9 3.1 General government financial balance³ _ -1.1 1.3 1.8 2.3 2.8 General government gross debt³ _ 33.5 34.6 34.7 34.5 33.9 Current account balance³ _ 3.9 2.9 2.4 1.5 1.6 Note: National accounts are based on official chain-linked data. This introduces a discrepancy in the identity between real demand components and GDP. For further details see OECD Economic Outlook Sources and Methods (http://www.oecd.org/eco/sources-and-methods).

1. Contributions to changes in real GDP (percentage of real GDP in previous year), actual amount in the first column.

2. As a percentage of disposable income.

3. As a percentage of GDP.

Source: OECD Economic Outlook 91 database.

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economies. Another important risk is rising oil prices, given that Korea is the world’s fifth-largest oil importer. On the domestic side, household debt reached 135% of household income in 2011. Rising interest rates, once Korea overcomes the current soft patch, could thus have a larger- than-projected damping effect on private consumption.