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Korea: Economic growth accelerates in Q3, but faces significant headwinds - NAB

Gerard Burg, Senior Economist at NAB, explains that the Republic of Korea is a key economy within the Asian region, with important implications for Australia and New Zealand.

Key Quotes

“Overall it is the world’s fourteenth largest economy, and the sixth largest in Asia (behind China, India, Japan, Indonesia and Turkey). In terms of trade, Korea is Australia’s third largest export markets for goods and the sixth largest for New Zealand.”

“Korea’s economic growth has accelerated in recent quarters (from recent lows in Q4 2016) – with growth of 3.6% yoy in Q3 2017. This was the strongest increase since Q1 2014. Recent growth has been driven largely by investment (particularly in the construction sector) and a partial recovery in exports. In contrast, consumption has remained relatively weak.”

“While economic growth has picked up recently, the trend rate of growth in the post-GFC period has been comparatively weak. Since the start of 2011, growth has averaged around the 3.0% yoy mark – compared with almost 5.0% yoy between 2001 and 2007.”

“Demographic pressures are set to be a key constraint on the domestic economy in coming years. According to the latest UN Population Prospects, Korea’s working age population peaked in 2016 and is set to decline in coming years. As a share of its total population, the working age population peaked at 73.4% in 2013 and has fallen since – with a growing pool of retired people to support.”

“Korea’s economy is highly dependent on trade – with exports accounting for almost 55% of real GDP in 2016. That said, growth in exports has been very slow in the post-GFC period, as consumption in key export markets has been constrained. Trade activity (both imports and exports) has become more closely tied to China over this period.”

“The Bank of Korea has maintained its policy rate at 1.25% since June 2016. Despite the steady drop in the base rate since 2012, monetary conditions have gradually tightened, reflecting the declines in inflation and appreciation the real effective exchange rate. In the absence of inflationary pressures, we expect the Bank of Korea to keep rates on hold in the short term. This reflects government policy measures to stimulate domestic consumption.”

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