South Korean economy likely to expand 2.8 pct in 2017, BoK to remain on hold until Q2 2018 - Scotiabank

The South Korean economy is indicating resilience to political and geopolitical turmoil. In the first quarter, the real GDP expanded 2.7 percent after a 2.4 percent growth in the fourth quarter of 2016. The nation’s output is expected to grow 2.8 percent year-on-year this year as a whole, consistent with the advance recorded last year.

Domestic demand is expected to drive the economic growth with investment growth showing signs of a rebound. Consumer spending is expected to continue to be supported by authorities’ fiscal and monetary stimulus measures, though an increased household debt burden will constrain private consumption growth slightly.

Given that the U.S. and China are South Korea’s top two export destinations, directly buying 43 percent of the country’s total shipments abroad, South Korea is amongst the most vulnerable nations in Asia to negative trade developments in the U.S. and China.

Furthermore, the South Korean economy is indirectly exposed as intermediate goods show a major share of South Korea’s intraregional exports. However, the external sector prospects have been shining in the recent months alongside the rebound in global economic activity. South Korea’s exports and industrial production are on an upward trend, and business confidence in the manufacturing sector is indicating signs of improvement.

Meanwhile, the Bank of Korea is expected to keep an accommodative monetary policy stance for an extended period of time due to global uncertainties and curtailed inflationary pressures. According to the Scotiabank, the Korean central bank is likely to keep its benchmark interest rate on hold at 1.25 percent until the second quarter of next year when a cautious monetary tightening phase will begin.

The country’s headline inflation has been hovering around 2 percent year-on-year in this year, while core inflation stays controlled at slightly below 1.5 percent year-on-year.

“We expect the headline inflation rate to pick-up in the third quarter of 2017 due to base effects, yet the rate will likely return toward the BoK’s 2 percent inflation target by the end of the year”, added Scotiabank.