Korea: Securing the Growth Momentum

  • Proactive policies can help shore up growth momentum
  • Structural reforms can foster new sources of growth beyond exports
  • High household debt not likely a systemic threat to financial stability
  • In their regular annual report on the health of the Korean economy, IMF economists suggest that the country’s current weak outlook could have a lasting impact on its growth. They call on the government to take additional fiscal and monetary policy actions if clear signs of a recovery do not emerge to shore up Korea’s economy.

    “The recent policy steps aimed at boosting demand are in the right direction, but their impact is still uncertain,” said Brian Aitken, the IMF’s mission chief for Korea.

    “A preemptive policy stance would protect against the risk of weak growth and low inflation becoming entrenched,” he added. In particular, there remains room for further monetary easing, if needed, and Korea’s low public indebtedness provides ample room for additional fiscal stimulus and reinforced social safety nets.

    Stalled growth momentum

    Korea’s growth momentum has stalled somewhat during 2014 and the outlook remains challenging, with sluggish domestic demand, low inflation, and increased external uncertainties. IMF economists expect the country’s growth to be in the range of 3 percent, with momentum picking up later in the year.

    With a highly open economy, Korea faces global cross-currents and the outlook will depend on a number of uncertain factors. As one of the world’s largest importers of oil products, Korea will clearly benefit from lower oil prices, says Aitken, but it may take some time before this translates into growth through higher investment and consumption.

    The main external risks include slower-than-expected growth in Korea’s main trading partners, the impact of a persistently weak Japanese yen on Korean export industries, and side-effects from global financial conditions, although the country’s solid external buffers will mitigate the impact of any renewed global financial volatility.

    Strong financial fundamentals

    Korea’s financial fundamentals are relatively strong, suggests the IMF report, which limits sources of short-run systemic risk. Banks remain well capitalized, and their funding and liquidity conditions are stable, it adds.

    Household debt as a share of income has been rising...

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