We recently hosted a group of global investors in April and met with representatives from think tanks, businesses and the public sector. Feedback on Korea`s growth prospects was mixed - the private sector appears to be more worried about growth, while public-sector experts think the economy is resilient and will deliver growth of over 3% in 2018.

The private sector appears to be more concerned about growth prospects, citing the US-China trade dispute and its potential impact on Korea, restructuring in the shipbuilding industry, and the housing-market slowdown. On the other hand, public think tanks take the view that the improving geopolitical situation will lead to increasing investment and higher tourist arrivals from China. They do not expect the US-China trade dispute to pose as a major hurdle to Korea`s exports that has remained strong throughout 2018.

Local analysts believe Korea`s economy will expand in line with the global recovery. Korea, as an export-led economy, tends to move in tandem with global growth patterns. However, concern was expressed about the lack of a strong GDP component to drive 2018 growth. Facility and construction investment - the main drivers of 2017 growth - are likely to slow amid the IT cycle and oversupply in the housing market. Domestic consumption has improved, but is unlikely to pick up rapidly as income growth remains weak.

Recent Q1 GDP data showed that facility investment - which was expected to slow - remained resilient due to increased IT investment. However, robust facility investment led to strong imports, resulting in a negative contribution of net exports to GDP growth (despite strong export growth in Q1).

We expect Korea`s economy to grow 2.8% in 2018, driven by small contributions from each GDP component rather than a single component (as has been the case in the past two years). Facility investment is likely to slow but still contribute positively to growth. Net exports - which have remained negative - will likely turn positive in H2, supporting GDP growth. However, this is likely to be the result of slower import demand instead of stronger exports.

Most experts agree that inflation will stay subdued in 2018 and most of 2019. They think demand-side pressure is weak amid a weaker job market and income growth. They also said that the minimum wage hike has not yet led to inflationary pressure.

The BoK is widely expected to raise policy rates gradually, as there is no imminent pressure to hike. While views on growth prospects differed among experts, most agreed that Korea`s monetary policy cycle will likely be much slower than the US rate-hiking cycle.

The BoK`s assessment of domestic growth appears weaker than last November, as it recently maintained its full-year 2018 growth forecast but lowered its H1-2018 forecast to 3.0% from 3.2%. Most agreed that the BoK should hike the base rate when inflation rises. CPI inflation is expected to remain well below the BoK`s 2% target in 2018 and 2019. Current weak consumption sentiment suggests limited pressure on demand-pull and long-term inflation, in their view.

Some experts were concerned about capital outflows and financial stability should the Fed funds rate rise to a much higher level than the BoK`s base rate. However, a majority think a rate differential will not cause capital outflows from Korea, as long-term bond investors are mainly central banks. The US-Korea policy rate differential reversed in March 2018, when the US policy rate rose above South Korea`s, leading to concerns about capital outflows. However, capital inflows increased, especially to the bond market, with foreigners investing KRW 3.67tn in Korean bonds. We therefore believe this shift in the rate differential is unlikely to result in sudden capital outflows.

【The contributions from outside analysts are unrelated to the views of the publisher. They have been contributed in English and the wordings have been mildly edited.】



By Head of SC Bank Korea Economic Research, Park Chong Hoon

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