Korea’s 2014 annual GDP growth is likely to close at 3.4%, affected by ‘High 1H-Low 2H’ trend, owing to a slower global recovery, drop in exchange rates and lower consumer spending.

Amid falling household propensity to consumption, conspired with other factors, such as a drop in consumer sentiment after the sinking of ferry Sewol and slowing employment growth, private consumption is expected to stay low in 2H. Investment recovery on facilities is expected to decelerate as policy risks widen after the June local elections. Export is expected to grow only by 5%, owing to growing uncertainty over global recovery, such as Europe (low growth, low inflation), China (slowing growth accompanied by the structural reform), Japan (recovery risk post-consumption tax hike), and emerging economies (risks associated with financial instability).

Consumer price grows at 2.0%, current account surplus expand at US$83.1 billion, and USD/KRW rally since 4Q at 1,035 won/$ on yearly average.

Consumer price in 2H are expected to be higher than that of 1H, as downward pressure is mitigated by narrowing negative production gap and rebound of international prices of raw materials. However, the speed at which it is ascending slows at 2.0% annually. Current account is forecast to record a US$83.1 billion surplus, marking higher than the previous year’s record high of US$79.9 billion, owing to a growing surplus caused by a fall in imports due sluggish domestic market. USD/KRW is expected to maintain a falling trend in 2H as dollar nudges on weakening euro and yen, and the won to float around a yearly average of 1,035 won/dollar.

Impact of the recent sluggish employment growth on consumption flexibility growth deteriorated by 1/3 compared with previous years; tangible recovery in private consumption hard to expect

Although employment is increasing in recent times, consumption flexibility has steadily deteriorated, leading to a conclusion that the recent employment growth is unlikely to have an impact on consumption increase. A closer look at the trends of average propensity to consumption by industry and age group shows that contribution of a newly employed on expenditure increase has fallen by about 35.8% between 2006 and 2013. In particular, the group aged between 30 and 49 was the key downward factor, as the group showed a falling average propensity to consumption while employment growth was minimal. The contribution from the group aged 50 or more, which showed the biggest employment growth, was insufficient to increase consumption flexibility growth as the positive impact of employment growth was outpaced by the fall of average propensity to consumption.

As a result, even though the number of paid-workers has increased by 476,000 in 2013, the number is estimated to be similar to 305,000 if the number is calculated based on its contribution on consumption spending. In other words, it is difficult to expect a prompt recovery of private consumption based on a sign of quantitative increase in employment.

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