Korea Adapts to Changing Landscape
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Page 10
Korea's economic strength testifies to its success in adapting to the changing global economic landscape by pursuing forward-looking and prudent policies. While near-term economic prospects are generally favorable, risks are mainly to the downside.
Since the 1998 Asian crisis, Korea's economy has expanded by nearly 6 percent a year, led by strong exports. Growth reached 5 percent in 2006 and is expected to slow marginally to 4¾ percent in 2007 (see table).
After staying below the central bank's target band of 2½-3½ percent over much of the past year, inflation has recently risen beyond the midpoint of the range, reflecting recent gains in oil and food prices as well as technical factors (see Chart 1). Meanwhile, unemployment has fallen to a four-year low of 3.1 percent.
The external current account is expected to remain in broad balance (neither in deficit nor in surplus), with strong exports offset by a higher oil import bill and a further widening of the services deficit. The financial sector is in good health, and the Korean currency, the won, appears to be "broadly appropriately valued," according to the IMF in its annual Article IV consultation with Korea.
Although the impact of the global financial turmoil on Korea's financial sector appears limited, a sharper-than-expected U.S. slowdown could have significant effects. In addition, the recovery in consumption is vulnerable to a downturn in asset markets and further oil price hikes. At the same time, long-term challenges are daunting: the rapid aging of the population risks threatening Korea's fiscal and external positions, while the erosion of its low-skilled manufacturing base and low productivity in the services sector could undermine external competitiveness and growth prospects.
After two consecutive rate hikes in July and August 2007 in response to the growth of monetary aggregates and asset prices, monetary policy tightening has paused, with growth and inflation risks appearing balanced. The monetary stance appears appropriate. If downside risks materialize, and provided inflationary pressures remain subdued, there may be scope for loosening monetary policy.
Export-led growth
[ SEE THE GRAPHIC AT THE ATTACHED ]
The current, broadly neutral fiscal stance is about...
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