Domestic demand primarily supports South Korean economic activity

China’s subdued economic activity continues to negatively impact South Korea’s economic outlook as the latter’s export sector is quite dependent on demand from China. More than one-fourth of Korea’s total exports are shipped to China. Moreover, South Korean economy is one of the most exposed economies in the region to the decelerating investment growth in China. Also, rising competition from manufacturers in China will continue to pose as challenges for exporters of South Korea.

Under this scenario, domestic demand is mainly underpinning the South Korean economic activity. Authorities’ fiscal and monetary stimulus measures are supporting consumer spending; however, an increased household debt burden would slightly limit private consumption growth, noted Scotiabank in a research report. In the mean time, South Korean government will give significant support to economic activity.

“We expect South Korea’s real GDP to expand by 2.7 percent y/y in 2016-17,” added Scotiabank.

Meanwhile, the Bank of Korea is expected to keep its monetary policy on hold in the months ahead as authorities assess the effect of recent easing and watch how global events unfold after the Brexit vote, according to Scotiabank.

Even if the central bank might consider additional monetary stimulus if economic conditions deteriorate, the BoK Governor Lee Ju-yeol has highlighted that accommodative monetary policy should not weaken financial stability. South Korean inflation continues to be muted. June’s headline inflation came in at 0.8 percent year-on-year, quite lower than the central bank’s target rate of 2 percent.

“We assess that the inflation rate is currently near its low point and will start climbing gradually toward 1.2 percent y/y by the end of the year," said Scotiabank.