Korea’s 2013 economic growth likely to close at 2.4%, 2014 GDP projected at 3.4%

The Korean national economy for 2013 is expected to reach at 2.4% despite positive effect of policy measures of supplementary budget and interest rate cut. This is a result of exports being forecast to remain around 3% range in the second half of 2013 due to the US fiscal impasse and the following market uncertainties of the surrounding emerging economies, as well as the weak.

Recovery rate in 2014 projected to be higher with gradual improvement in domestic and global conditions, but is expected to fall below the level of potential growth (approx. 3.5%). The slow recovery is attributed to uncertainties relating to the decision regarding the US Fed’s exit strategy and domestic issues such as on-going household “deleveraging” (debt reduction), and legislation related to economic democratization all of which have dampened private spending and investment sentiment.

Consumer price grows at 2.6%, current account surplus records US$49.5 billion and USD/KRW to mark 1,074

Consumer prices in 2014 are projected to slightly increase comparable to the average rate at 1.4% in 2013 due to the upward pressure of public utility charges and base effect. However, the increase is expected to be slowing around the 3% range, owing to gentle but steady recovery, the fall of USD/KRW and the stabilizing trend of the international prices of raw materials. Current account surplus is expected to reach a record high at US$61.8 billion in 2013, followed by a short fall at around US$50 billion in the following year due to rise in import amount and the reversal of services account into deficit. USD/KRW is expected to show an ascending trend around 1,074 in 2014, from this year’s average of 1,100.

Need to prepare for exit strategy of advanced economies, maintain current account surpluses, emphasize the use of macroeconomic stabilizing policy and pursue interest rate rise with prudence

Owing to the advanced economies decision to slow down on quantitative easing, financial markets of the emerging economies may show signs of instability. With estimated net accumulated foreign capital inflow to the stock and bond markets of Korea at 8.7% of GDP since 2009, Korea has higher than the average ratio of foreign capital/GDP among 10 other emerging markets.

The capital freeze index of the emerging markets, the index to calculate the risk of an abrupt end to capital inflows, demonstrates that the vulnerability of Korean financial market is higher than average for risks associated with capital outflow. Therefore in order to minimize volatility of the financial market prompted by exit strategies of the major economies the following are necessary: 1) maintain current account surpluses, 2) emphasize the use of macroeconomic stabilizing measures, and 3) be cautious in interest rate increase.

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