South Korea Watch Growth subMersion
Group Economics Emerging Markets Arjen van Dijkhuizen +31 20 628 8052
10 July 2015 •
Economic slowdown has continued in recent months, with MERS outbreak hitting confidence and spending
•
Exports suffer from lower external demand, strong won
•
Authorities have reacted with fiscal stimulus and monetary easing, although Bank of Korea remained on hold in July
•
We leave 2015 growth forecast unchanged at 3% for now, following a reduction earlier this year
Economic growth continues its downward slide
terms in April and May by around 2.5% yoy. After having
South Korea managed to overcome the tapering tantrum in
accelerated in recent months, retail sales are likely to have
2013 relatively unscathed. Still, growth started to slow since
cooled recently due to the impact of MERS. Sales in
Q1-2014, falling to a two-year low of 2.5% yoy in Q1-2015.
department stores and discount chains were reported to have
According to the central bank, growth momentum has
contracted by 10% yoy in June. Services industries including
weakened further in Q2. The slowdown is quite broad-based.
tourism seem to have been particularly affected.
Private consumption suffers from high debt levels and falling growth in disposable income, with households savings surging
Export and import growth in negative territory
last year. Meanwhile, investment is hindered by slowing
% yoy
50
exports, hit by falling external demand and the strong won.
15 10
Manufacturing PMI points to further slowdown % yoy
25
8
65
6
60 55
4
50 2
45
0
40
-2
35 08
5
index
09
10
11
Economic growth (lhs)
12
13
14
15
Manufacturing PMI (rhs)
Source: Thomson Reuters Datastream
0
0 -5
-25 -10 -50
-15 08
09 10 11 Current account balance
12
13 Exports
14
15 Imports
Source: Thomson Reuters Datastream
Another stimulus package following a confidence shock South Korea’s public finances are relatively healthy, as the budget shows small surpluses and public debt is around 37% of GDP. This creates room for fiscal stimulus. Last year, the
MERS has hit confidence
government launched a stimulus package after the Sewol ferry
More recently, the outbreak of the Middle East Respiratory
incident hit confidence.The story repeats itself. Last June, the
Syndrome (MERS) disease – Korea reported its first case in
government presented a fresh stimulus package (equivalent to
May – seems to have affected both consumer and business
around 1.5% of GDP) in reaction to the MERS outbreak,
confidence. So far, 186 people have been infected and 35
consisting of a supplementary budget and additional spending
have died. Both the consumer and the business confidence
measures. Still, longer term contingent liabilities for the budget
index dropped sharply in June, after having slowly recovered
stem from expensive pension systems, as pension reforms
in previous months. MERS also seems to have given the
only proceed slowly.
Manufacturing PMI, which had already fallen from 51.1 in February to 47.8 in May, another blow. The index dropped to
Exports hit by lower external demand and strong won
46.1 in June, the lowest level since September 2012.
Despite attempts to diversify South Korea’s growth model, the country is still heavily reliant on exports. In 2014, exports of
Latest activity data do not bode well either
goods and services accounted for 52% of GDP. Korea’s
The latest activity data do not paint a very convincing picture
exports of electronics are sensitive to the global business
either. Industrial production has been contracting in annual
cycle. Export growth has fallen strongly in recent years,
2 South Korea Watch: Growth subMersion – 10 July 2015
reflecting lower external demand and currency appreciation.
After the June rate cut, BoK remains on hold in July
Exports to Japan, in particular, but also to the eurozone have
With inflation levels remaining far below the target zone of 2.5-
been on a declining trend for a few years now, while exports to
3.5%, the Bank of Korea (BoK) has continued with monetary
China have stagnated. The real effective appreciation of the
easing, despite its traditional cautiousness related to large
won is hurting external competitiveness. The won has
household debts. After two 25 bp policy rate cuts last year, the
strengthened by around 65% versus the yen since 2012 and
BoK cut rates twice this year as well, to a record low of 1.5%.
by around 60% versus the euro since 2009. Still, import growth
According to the BoK Governor, the June cut was a pre-
has fallen hand in hand with export growth, partly reflecting the
emptive move aimed at mitigating the fall-out from the MERS
weakness of domestic demand, resulting in even higher
outbreak. On its 9 July meeting, the BoK left the policy rate on
surpluses on the trade balance and the current account.
hold. Assuming headline inflation to rise gradually in the second half of this year, we expect the BoK to remain on hold.
Exports to Japan, eurozone impacted by won strength Outlook and main risks
Index, Jan. 2008 = 100, 12 months rolling
180
Earlier this year, we cut our 2015 growth forecast from 3.5% to 3%. Although downside risks to the outlook have risen further,
160
we keep our 2015 forecast unchanged right now. We expect 140
some acceleration of growth to 3.5% in 2016. This view is
120
based on several assumptions. First, we assume monetary easing and fiscal stimulus to support domestic demand.
100
Second, we expect export-oriented Korea to profit from improving global growth and trade. Third, we assume there will
80
be no sharp slowdown in China (Korea’s main export
60 08
09
10 China
11 US
12 Japan
13 14 Eurozone
15
destination), assuming the Chinese authorities will succeed in managing the fall-out from the latest stock market correction and keep Chinese growth close to their 7% target this year.
Source: Thomson Reuters Datastream
Still, current growth levels remain clearly below the levels seen
Despite recent uptick, inflation remains low Falling commodity prices and weak domestic demand have driven inflation down. Since late 2014, headline inflation has fallen below 1% yoy, dropping to a record low of 0.4% yoy in March/April. Spurred by higher food prices, inflation has risen a bit in recent months, reaching 0.7% yoy in June. Core inflation has remained more stable at around 2%. We expect headline inflation to gradually rise in the second half of this year (annual forecast: 1%), but to remain relatively low.
in the first part of this century, with growth averaging around 6% in the years between the Asia crisis and the global financial crisis. This underlines that Korea has to step-up structural reforms to leave its growth model less dependent on exports. Main risk to the outlook stems from disappointing growth in China and the advanced economies. We still think South Korea is relatively well-placed to manage potential contagion from a faster-than-expected Fed lift-off, given its strong fiscal and external fundamentals. Key forecasts for the economy of South Korea
Inflation rebounds, BoK on hold in July
2012
2013
GDP (% yoy)
2.3
2.9
3.3
3.0
3.5
CPI inflation (% yoy)
2.2
1.3
1.3
1.0
2.0
Budget balance (% GDP)
1.3
1.0
0.5
0.5
1.0
3
Government debt (% GDP)
35
36
37
37
38
2
Current account (% GDP)
4.2
6.2
6.5
5.5
4.5
Gross fixed investment (% GDP)
29.6
29.3
29.1
31.9
31.9
Gross national savings (% GDP)
35.2
35.3
35.5
37.5
36.7
USD/KRW (eop)
1071
1055
1099
1130
1150
EUR/KRW (eop)
1390
1454
1330
1130
1323
% yoy
6 5 4
2014 2015e 2016e
1 0 08
09
10 CPI
11
12
Core CPI
Source: Thomson Reuters Datastream
13
14
15
Policy rate
Budget b alance, current acc. for 2015 and 2016 are rounded figures
Source: EIU, ABN AMRO Group Economics
3 South Korea Watch: Growth subMersion – 10 July 2015
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