A set of challenges such as sluggish job growth and weak investment spending may set the economy back over the course of 2018. The bank of Korea has cut its forecast of gross domestic product (GDP) growth for this year considering increased economic uncertainties at home and abroad such as rising global trade tensions and a slump in equipment investment. According to the central bank, the nation's GDP is now expected to expand by 2.9 percent, a marginally slower pace than its earlier estimate of 3 percent made in April.
Consumer spending is expected to grow moderately backed by the government's stimulus measures and solid consumer confidence. The growth forecast for private consumption remains the same at 2.7 percent as the April estimate. A significant improvement in the inter-Korean relationship could further boost consumer spending. Yet the increasing burden of household debt payments and a delayed improvement in job market conditions could limit a pick-up in consumer confidence.
Equipment investment growth is projected to slow down more sharply than expected to 1.2 percent in 2018 versus an earlier forecast of 2.9 percent. The IT sector is causing the drastic downturn in overall equipment investment due partly to a high base effect, and this slowdown trend is likely to continue into the coming year. However, non-IT sectors will show modest growth in their investment spending, including some fresh investments in new and eco-friendly technologies by the communications, motor, and petrochemical sectors.
Construction investment is expected to shrink by 0.5 percent in 2018 compared to an April estimate of -0.2 percent. The strong pace of expansion in construction investment over the past several years has obviously come to an end. The housing sector, in particular, is slowing down rapidly amid excessive supply of new apartment units. The non-residential sector is also experiencing a decrease in construction starts, and a cut in government spending on infrastructure is expected to render civil engineering works sluggish.
Around 180,000 new jobs are projected to be created in 2018, down from 320,000 in the previous year and from a previous estimate of 260,000. Hikes in statutory minimum wage are one of the major factors that affect job market growth adversely. In spite of a slumping construction sector, the unemployment rate is expected to remain at 3.8 percent, while the employment rate is projected at 60.9 percent. Employment conditions in the manufacturing industry will likely put a drag on overall job creation as some sectors including automobile manufacturing remain sluggish or face restructuring. In the service sector, on the other hand, the government's policy to support job creation will help boost job market growth.
The BOK expects consumer price inflation to remain subdued at 1.6 percent in 2018, down from 1.9 percent in 2017. The core inflation rate, which strips out volatile food and energy prices, is projected at 1.4 percent. Upward pressure on inflation arises from international oil price hikes and a weakening won, which may drive up import prices across the board. An increase in oil production and the resulting brake on rising oil prices may create downward pressure on inflation.
The nation's current account surplus is anticipated to diminish further to USD 65 billion in 2018, compared to USD 78.5 billion in 2017 and a previous forecast of USD 70.5 billion. Global economic recovery will help expand Korea's exports, leading to an overall positive balance in the merchandise account. Meanwhile, the nation's service account deficit is likely to widen due to a sluggish transportation service sector, although the balance of payments in the travel account is expected to improve amid a growing number of incoming tourists.
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