Republic of Korea’s Economic Outlook: Facing Strong Head Wind

ESCAP’s annual survey analyses region’s challenges, proposes solutions

Bangkok (UN/ESCAP Information Services) – The financial crisis has taken its toll on the Republic of Korea’s economy, with growth dropping from five per cent in 2007 to 2.5 per cent in 2008 and is expected to contract by 1.5 per cent in 2009.

Although the economy put up a strong performance in the first half of the year – achieving growth of over 5.0 per cent – as the global financial crisis deepened the economy was inevitably hit due to its heavy dependence on exports and high exposure to foreign financial markets, according to the Economic and Social Survey of Asia and the Pacific 2009.

The flagship publication of the United Nations’ regional arm – the Economic and Social Commission for Asia and the Pacific (ESCAP) – this year’s issue is titled "Addressing Triple Threats to Development.” It analyzes the three global crises which have converged to threaten development in the Asia-Pacific region: the financial crisis, fuel and food prices, and climate change. The Survey provides a regional perspective as well as country-specific analyses, outlining ways in which economies in the region can move forward in unison towards a more inclusive and sustainable development path.

Even among export-oriented economies, the drop in exports in the Republic of Korea was very pronounced, falling from an average of over 20 per cent growth in the first three quarters of 2008 to a decline of nearly 10 per cent in the last quarter of the year, with the drop continuing to accelerate in the beginning of 2009.

Additionally, the impact of the global financial crisis has quickly spread from the export sector to domestic demand. Consumption slackened noticeably in 2008, only expanding by 1.1 per cent in the third quarter, before falling sharply by 4.4 per cent in the last quarter.

Investment in the Republic of Korea was also very sluggish over the course of 2008, following marginal growth of 0.7 per cent on average in the first three quarters; investment plunged by 8.4 per cent in the fourth quarter.

Policy response centres on fiscal stimulus package To support the economy in the face of the deepening crisis, the Republic of Korea announced various forms of fiscal stimulus packages. On top of a $130 billion bank bail-out, the country also approved, in its latest budget, a fiscal support plan equivalent to around four per cent of gross domestic product.

The moderation of inflation since mid-2008 gave more room for accommodating monetary policy in the face of the slackened economic performance. In a coordinated move with other central banks, the Bank of Korea cut its key policy interest rate in early October, slashing the rates again in subsequent months as the credit freeze deepened. With all the cuts, the Bank of Korea base rate stood at two per cent at end-February 2009, compared to five per cent at the end of 2007 and three per cent at the end of 2008.

Growth in the Republic of Korea is forecast at -1.5 per cent in 2009, while inflation is expected to ease to 1.6 per cent. The Survey notes that this is attributable to the country’s weak export performance due to decreased foreign demand, but private consumption and investment will also slow as concerns grow about employment, prices and high consumer debt.

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The Economic and Social Survey of Asia and the Pacific 2009 is available online from 0500 GMT/1200 Bangkok on 26 March at: http://www.unescap.org/survey2009/index.asp

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