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제목 Revised Economic Outlook for Korea

The Korean economy is solidly on track to rebound in 2021 even when the nation’s battle with COVID-19 continues. The contraction in Korea’s GDP in 2020 was modest in comparison to many other advanced economies, and the Korean economy held up better and showed greater resilience in the face of economic downturns triggered by the pandemic. This relatively good performance reflected strong fiscal and monetary policy response and robust external demand, especially for semiconductors, consumer electronics and health products. These growth drivers will likely continue to keep the economy moving forward.

< Economic Growth Outlook by the OECD >

(Unit: %)

Economy

2020

2021

2022

Forecast in March

Forecast

in May

Change

(%p)

Forecast in March

Forecast

in May

Change

(%p)

World

-3.5

5.6

5.8

0.2

4.0

4.4

0.4

G20

-3.1

6.2

6.3

0.1

4.1

4.7

0.6

EU

-6.7

3.9

4.3

0.4

3.8

4.4

0.6

Korea

-0.9

3.3

3.8

0.5

3.1

2.8

-0.3

(Sources: OECD, the Ministry of Economy and Finance of Korea, May 31, 2021)

 

With prospects for the global economy improving, economic growth projections for Korea have been revised upwards. In late May, the Organization for Economic Cooperation and Development (OECD) upgraded Korea’s GDP growth forecast to 3.8% from its previous projection of 3.3%. “Strong export growth, rising investment and expansionary macroeconomic policy are boosting the economy. Distancing measures have contained the COVID-19 virus spread, but weigh on large parts of the service sector, which keeps unemployment and the household saving ratio relatively high. When those restrictions can be lifted, the economy will gather momentum,” the OECD said in a report on the global economic outlook.

The OECD’s revised forecast came on the heels of the Bank of Korea’s projections. Korea’s GDP is expected to grow by 4% in 2021 following a reduction of 1% in 2020, according to the revised outlook released by the Bank of Korea on May 27, 2021. Consumer spending is projected to rebound to a 2.5% increase in 2021 after a sharp contraction in 2020. Household savings have increased as the COVID-19 pandemic caused uncertainty regarding future income and employment prospects. These increased savings may turn into a driver of consumption growth once the pandemic is kept in check.

(Source: Bank of Korea, May 27, 2021)

 

However, the pace of recovery may not be as fast as hoped for. A slower recovery may be attributed to delayed improvement in household income and the continued implementation of social distancing measures. Inevitably, the speed of recovery depends on effective and sustained control of COVID-19 and swift vaccination.

Equipment investment is expected to rise by 7.5%, driven by solid investment spending in the IT sector and a recovery in non-IT investment. Construction investment will rebound with a 1.3% growth being forecast for 2021. The civil engineering construction sector will continue to fare well thanks to the government’s investment in infrastructure, while the severe contraction in residential construction is set to slow down.

A steady upward trend will continue for intellectual property investment, which is forecast to grow by 4.3% in 2021. R&D investment is expected to be on the rise thanks to improving corporate revenues in the private sector and an increase in government budget for R&D. Growing demand for software applications for online platforms and services will also help boost investment activities in other intellectual property sectors.

 

< Korean Economic Growth Outlook for 2021 >

(Unit: %)

 

2020

2021(E)

2022(E)

H1

H2

Annual

H1

H2

Annual

GDP

-1.0

3.7

4.2

4.0

3.2

2.8

3.0

Consumer Spending

-4.9

1.0

4.0

2.5

4.7

2.3

3.5

Equipment Investment

6.8

10.7

4.3

7.5

2.8

4.2

3.5

Intellectual Property Investment

3.6

3.6

5.0

4.3

4.3

3.4

3.8

Construction Investment

-0.1

-1.0

3.4

1.3

2.3

2.7

2.5

Merchandise Exports

-0.5

14.8

4.0

9.0

1.9

3.1

2.5

Merchandise Imports

-0.1

11.0

5.9

8.3

3.0

4.0

3.5

Unemployment Rate

4.0

4.3

3.5

3.9

4.0

3.6

3.8

Consumer Price Inflation

0.5

1.7

2.0

1.8

1.3

1.4

1.4

Current Account Surplus

(USD billion)

75.3

33.0

37.0

70.0

28.0

37.0

65.0

(Source: Bank of Korea, May 27, 2021)

 

The nation’s external trade conditions are on track to improve, with a broad recovery in global demand setting the stage for an exports rebound. Merchandise exports are projected to grow by 9% in 2021, backed by the IT sectors, particularly the semiconductor industry. Non-IT sectors are also heading for a robust recovery as demand for petroleum-based products is likely to expand. Robust export performance may offset weakness in domestic consumption, helping the economy emerge from the pandemic-triggered slump faster than expected.

Korea’s current account surplus is projected to reduce to USD 70 billion in 2021 from USD 75.3 billion in 2020 mostly due to an increase in service account deficit. Since the onset of the COVID-19 pandemic, many countries have imposed travel restrictions, and the resulting plunge in international travel has led to a decline in service account deficit. When the spread of coronavirus is subdued, the amount of deficit may widen again. The nation’s merchandise account surplus is likely to narrow when international oil prices see an upside in 2021.

Consumer price inflation will likely trend up from 0.5% in 2020 to 1.8% in 2021 as upward pressures may gather some strength in line with a rising pace of economic recovery. Rising prices of crude oil and agricultural produce and a hike in housing rental costs will become factors that push inflation up. Meanwhile, there will be weaker downward pressures coming from government policy measures such as government subsidies for high school education and mobile phone bills. Core inflation, which excludes food and energy prices, is also forecast at 1.2% in 2021, up from 0.4% in 2020. 

Sluggish labor market conditions are likely to continue into 2021, although the number of the employed people is bouncing back. Around 140,000 persons are expected to be added to the workforce in 2021 compared to a decrease of 220,000 in 2020. Once the surge in new COVID-19 cases is tamped down, a modest recovery is expected in the most impacted sectors such as hospitality, brick-and-mortar retailers, restaurants, entertainment and recreation. The job reduction in the manufacturing industries will also slow down, backed by demand recovery at home and abroad. The unemployment rate is projected at 3.9% in 2021 down from 4% in 2020.

 
 
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