Republic of Korea
Country briefing note <download pdf file>
Growth slows as global economy weakens
- In the Republic of Korea, economic growth slowed to 2.0% in 2012 from 3.6% in 2011. A weaker global economic environment and gloomier consumer sentiment led to a slowdown in growth despite investment in the information technology sector and the frontloading of the budget.
- The economic recovery at the beginning of the year proved to be short-lived, with domestic consumption, exports and fixed investment weakening sharply since the second quarter 2012. Economic activity was basically flat in the third and fourth quarters. In particular, the stagnating and unresponsive property market weighed down heavily on investor sentiment.
- Slowing growth in China and weak domestic spending resulting from high levels of household debt and depressed property prices is likely to negatively impact growth in 2013. GDP is forecast to grow by 2.3%.
Inflationary pressures subside but volatile food and fuel prices continue to affect households
- Inflation, which was a major concern in 2011, slowed in 2012 due to declining growth. Consumer prices dropped to 1.2% in August – a 12-year low- before rising slightly towards the end of the year, sparking deflation worries.
- For the year as a whole, inflation fell to 2.2% in 2012 from 4% in 2011 and is likely to remain on the low side in 2013, but volatile food and fuel prices may resurface as a result of increased global liquidity.
Expansionary monetary and fiscal policies adopted to address inclusive economic growth
- In responding to concerns that growth may be slowing too quickly, the Ministry of Foreign Affairs and Trade acted proactively to ward off possible volatility and cut the forward position limit for foreign banks from 200% to 150% of capital, and from 40% to 30% for domestic banks in December 2012. The Bank of Korea lowered the base rate by 50 basis points to 2.75% in two steps, in July and October 2012.
- The Government announced in June 2012 stimulus spending of 8.5 trillion won ($7.4 billion), equivalent to about 0.6% of GDP, which added a quarter of a percentage point to GDP in 2012. An additional stimulus package was announced in 2013 in response to stagnating growth.
- In line with the new President's commitment to make economic growth more inclusive, the government will assign 60% of its 2013 budget in the first half of the year for infrastructure projects, job-creating endeavors and social protection schemes.
Net exports remain positive but intraregional trade growth weakens
- Exports accelerated more rapidly than imports. The trade balance briefly fell into deficit early in 2012 as shipping exports slowed and semiconductor prices kept declining, but by the end of the year the current account surplus increased to 3.9% of GDP, aided by a sharp increase in the export of mobile communication devices to emerging markets.
- Inward FDI reached record highs in the first nine months of 2012 ($11.2 billion, up by 48% from 2011). Performance in the third quarter was the best on a quarterly basis since 2002. For the whole year, inward FDI increased by 19%.
Emerging socioeconomic challenges for inclusive and sustainable development
- The unemployment rate in the country was 2.9%, lower than it had been 2011. However, there are concerns that the quality of new jobs being created is declining; many of new jobs are on short-term contract basis and in the service sector.
- Relative poverty – the share of the population living on less than half of the median income – is still common in the country. Inequality has also risen, driven by labor market dualism, high university tuition fees and growing household debt.
- Gender inequality remains a concern. Women account for 14.7% of the seats in the national parliament in the Republic of Korea, and the gender wage gap marked 39%, the widest among OECD countries. Gender-responsive budgeting in the country is considered one of the most comprehensive and progressive national schemes in the world, and it is a key to ensure accountability to the public for policy commitments.
- The environment is one of the main dimensions of sustainable development. In the Republic of Korea, the Total Air Pollution Load Management System, an advanced environmental management system which rations annual total allowable emissions, has been implemented.