Economic, political uncertainties likely to weigh on South Korea’s GDP growth

The outlook for domestic demand is deteriorating. Consumer confidence has fallen sharply in the wake of the political storm caused by President Park’s scandal. Given a messy political situation, it has also become doubtful whether fiscal policy will be used in a swift manner to support the economy.

Park’s government has pursued a supplementary budget almost every year since she took office in 2013. Without another extra budget, public spending growth will slow markedly on an annual basis in 2017. The upcoming development is that the impeachment against Park will be voted in the parliament this Friday. If the bill is passed, she will suspend duties and transfer power to the Prime Minister, until the constitutional court makes ruling within the next six months.

Cross-party conflicts could continue during this transition period, regarding whether or how to select a new Prime Minister and establish a neutral cabinet. Whether the court will support the impeachment is also unclear and uncertain. On the other hand, if the impeachment vote fails, Park may survive in office for a longer time (she has accepted the ruling party’s proposal for her to step down voluntarily in April 2017). In either case, political chaos would continue for several months until a new president is elected at some point next year.

In addition to politics, economic factors may also weigh on the outlook for domestic consumption and investment, including corporate restructuring in the overcapacity sectors, surge in household debt, rebound in energy prices, and depreciation of the KRW.

"We now look for GDP growth of 2.5 percent in 2017, a slower rate compared to 2.7 percent this year (old forecast: 2.8 percent in 2016, 2.7 percent in 2017)," DBS commented in its recent research report.