Economic Outlook for

Korea and Asia

July 4, 2018 KIM, Hyeon-Wook

I. Global and Asian Economy

II. Korean Economy

III. Structural Issues and Policy Implications

Part-01 Current Status and Prospects of
the Global and Asian Economy
 4

Global Economy in Recovery

Global industrial production and trade volume exhibited gradually

moderating but still high growth rates, implying that global outlook
remains positive.

World Industrial Production World PMI and OECD+NME

and Trade Volume Leading Indicator
(Year-on -Year % Change, 3M A) (Base=50) (Base=100)
6 55 100.4

5 Industrial Production 54 OECD+NM E 100.2

Leading Indicator (right)
4 53 100.0

3 52 99.8

2 Trade Volume 51 99.6

1 50 99.4
PM I (left)
0 49 99.2
6 9 12 3 6 9 12 3 6 9 12 3 6 9 12 3 6 9 12 3 6 9 12 3
2015 2016 2017 2018 2015 2016 2017 2018

Source: CPB; Bloomberg; OECD.

 5

US Economy is Leading the Recovery

GDP in Major Countries

(2008 1/4=100)
120
미국
US
115
영국
UK
110
독일
Germany
105
프랑스
France
100
일본
Japan
95
스페인
Spain
90 포르투갈
Portugal
85 이탈리아
Italy

80 그리스
Greece

75

70
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
 0
2
3
4
5
7

1
6
Manufacturing

Food, beverages
& tobacco

2011~16

Source: Global Insight.

Textiles, apparel
and leather
2017~18

Wood, paper &

printing

Chemical,
rubber, plastics,
mineral

Metals & metal

products

Machinery &
equipment

Transport
… also lead by IT-related Industry

Global Economic Growth Rates by Industry

equipment

Furniture, repair,
safety, other

Electrical &
electronic
(%)
6
 7

Japanese economy was weakened a bit

Japan’s GDP growth turned into negative for the first time since 2016.
It is mainly due to the sluggish in export and shrinking in domestic
demand, implying the weakening of economic recovery trend.

Japan GDP and Contribution

(Q -on-Q % C hange, % p)
2.0
P rivate D em an d P u b lic D em an d
1.5
Extern al D em an d G DP

1.0

0.5

0.0

-0.5

-1.0
I II III IV I II III IV I II III IV I
2015 2016 2017 2018

Source: Japan Cabinet Office

 8

… but in moderate upward trend

Japanse industrial production has been weaken recently, but
production holds its upward trend with a broad range of industries
such as automobiles and semiconductor manufacturing equipment.

Industrial Production and Business Condition Leading

Capital Goods Shipment Index and Manufacturing PMI
(% ) (2 0 1 0 = 1 0 0 ) (B ase= 5 0 )
12 109 56
In d u strial
Lead in g In d ex (Left)
P ro d u ctio n
8
106 54

4
103 52
0

100 50
-4

97 48
-8 C ap ital G o o d s
M an u factu rin g P M I (R ig h t)
Sh ip m en t
-1 2 94 46
6 9 12 3 6 9 12 3 6 9 12 3 6 9 12 3 6 9 12 3 6 9 12 3
2015 2016 2017 2018 2015 2016 2017 2018

Source: METI; Cabinet Office.

 9

Japanese exports keep rising path

Japan’s export increasing trend is expected to continue with global

economic growth and high demand for capital investment.

Real Export by Destination Real Export by Item

(2 0 1 5 = 1 0 0 , 3 M A ) (2 0 1 5 = 1 0 0 , 3 M A )
140 130
R eal exp o rts R eal exp o rts
130 U n ited States C ap ital g o o d s
EU
120 M o to r veh icles an d related g o o d s
120 C h in a
IT-related g o o d s

110 110

100
100
90

80 90
3 6 9 12 3 6 9 12 3 6 9 12 3 3 6 9 12 3 6 9 12 3 6 9 12 3
2015 2016 2017 2018 2015 2016 2017 2018

Source: METI; Cabinet Office.

 10

Chinese economy is growing well.

China’s economy sustained moderate growth driven by consumption

expenditure.

• In the first quarter of 2018, China’s GDP growth rate recorded 6.8%.

GDP Growth Rates

(% , % p )
12
Fin al co n su m p tio n exp en d itu re G ro ss cap ital fo rm atio n
10
N et exp o rt G DP
8

-2
Ⅱ Ⅲ Ⅳ Ⅰ Ⅱ Ⅲ Ⅳ Ⅰ Ⅱ Ⅲ Ⅳ Ⅰ Ⅱ Ⅲ Ⅳ Ⅰ Ⅱ Ⅲ Ⅳ Ⅰ
2013 2014 2015 2016 2017 2018
Source: National Bureau of Statistics of China.
 11

Trade conflict is a major risk factor

China’s trade balance by major country

(Ten b illio n U S D o llar)

60
2015
2016
40 2017

20

-20
Total U nited H ong K ong U nited G erm any Japan K orea Taiw an
States K ingdom

Source: CEIC.
 12
The corporate debt ratio is the highest
among the other countries.

Since the global financial crisis, corporate debt has increased faster
than other countries.

Credit to Non-financial sector China’s debt composition ratio

(G D P o f % ) (G D P o f % )
400 300
N o n fin an cialsecto r N o n fin an cialco rp o ratio n
N o n fin an cialco rp o ratio n 250 H o u seh o ld s an d N PISH s
300
G en eralg o vern m en t
200

200 150

100
100
50

0 0
Japan France C hina U nited states K orea A dvanced Em erging
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Econom ies M arkets

Source: BIS.
 13

Emerging Asia will sustain stable growth

Most of emerging Asian economies continue sound recovery

Real GDP Exports (Volume)

자료: IMF.
 14

Robust trade despite rising tensions

Trade growth in Asia rebounded sharply in 2017 in response to

robust external demand.

Change in Nominal Exports

Source: ADB.
 15

Private debt mounting in Asia

Low global interest rates since the global financial crisis, reflecting
unprecedented monetary expansion in the advanced countries,
encouraged Asian households and companies to borrow heavily, driving
up the ratio of private debt to GDP in many Asian economies.

Ratio of Debt to GDP in Developing Asia

Source: ADB.
 16

Outlook for Emerging Asian Economies

Asian economies are projected to continue on a relatively favorable

recovery trend in 2018~19 influenced by continued increases in investment
and trade and expectations of the US’ expansionary fiscal policy.

IMF’s Economic Outlook for 2018-2019

Source: IMF.
 17

Global Economic Outlook

The IMF projected a global growth of 3.9% for 2018-2019, reflecting the
economic stimulus plans of advanced economies including the US.

IMF’s Global Economic Outlook for 2018-2019

(%)

World US Eurozone Japan China Russia

2017 3.8 2.3 2.3 1.7 6.9 1.5
3.9 2.9 2.4 1.2 6.6 1.7
2018 (3.9) (2.7) (2.2) (1.2) (6.6) (1.7)
(3.7) (2.3) (1.9) (0.7) (6.5) (1.6)
3.9 2.7 2.0 0.9 6.4 1.5
2019 (3.9) (2.5) (2.0) (0.9) (6.4) (1.5)
(3.7) (1.9) (1.7) (0.8) (6.3) (1.5)
Note: ( ) and ( ) are estimates announced in Oct. 2017 and Jan. 2018, respectively.
Source: IMF.
Part-02 Current Status and Prospects
of the Korean Economy
 19

Korea’s Economic Growth

The Korean economy is maintaining moderate growth with continued

improvements in the service sector despite a sluggish construction industry.

GDP Real Growth Rate

(% )
4

3 3 .8

G D P (Y ear-o n -Y ear % C h an g e) 2 .8 2 .8
2
1 .4
G D P (Q u arter-o n -Q u arter % C h an g e) 1 .1
1

-0 .2
-1
Ⅰ Ⅱ Ⅲ Ⅳ Ⅰ Ⅱ Ⅲ Ⅳ Ⅰ Ⅱ Ⅲ Ⅳ Ⅰ

2015 2016 2017 2018

Source: The Bank of Korea

 20

Slowdown in Investment Growth

• Growth in construction investment is slowing mostly in residential

housing.
• Facilities investment posted a moderating growth influenced by the base
effect from last year’s spike in semiconductor manufacturing equipment.

Value of Construction Completed Equipment Investment

(Year-on-Year % change, 3MA) (Year-on-Year % change, 3MA)

60 40

50 Value of Construction Machinery Investment

30
Completed(Dwelling)
40
20
30
10
20
0
10 Equipment
Value of Construction -10 Investment
0
Completed(Total) Index
-10 -20
6 9 12 3 6 9 12 3 6 9 12 3 6 9 12 3 6 9 12 3 6 9 12 3

2015 2016 2017 2018 2015 2016 2017 2018

Source: Statistics Korea

 21

Private consumption expanded sharply

Private consumption has expanded sharply, exceeding the income growth

rate as net overseas consumption sustained a relatively high contribution rate.

Contribution to Private
Private Consumption and GDI
Consumption
(Y ear-o n -Y ear % C h an g e) (Y ear-o n -Y ear % C h an g e, % p )
8 6
N et O verseas C onsum ption
5 N on-profit O rgan izations
D om estic H ouseh old C onsum ption
6
G DI 4 Private C onsum ption

3
4

2
1

P rivate C o n su m p tio n
0
0
Ⅰ Ⅱ Ⅲ Ⅳ Ⅰ Ⅱ Ⅲ Ⅳ Ⅰ Ⅱ Ⅲ Ⅳ Ⅰ -1
Ⅰ Ⅱ Ⅲ Ⅳ Ⅰ Ⅱ Ⅲ Ⅳ Ⅰ Ⅱ Ⅲ Ⅳ Ⅰ
2015 2016 2017 2018
2015 2016 2017 2018

Source: Bank of Korea; Statistics Korea

 22

Export growth slow down

Export growth is slowing on sluggishness in several items despite the

robust growth in semiconductors and some other items.

Contribution to Exports World Trade & Exports (Volume)

(Y ear-o n -Y ear % C h an g e, % p ) (Y ear-o n -Y ear % C h an g e)
30 30
V essel
25
M o to r V eh icles & Parts 25 Exp o rts(V o lu m e)
20
Petro ch em ical& Petro leu m
20
15 Pro d u ct
Sem ico n d u cto r
10 15
Exp o rt
5
10
0
5
-5

-1 0 0
W o rld Trad e V o lu m e
-1 5
-5
Ⅰ Ⅱ Ⅲ Ⅳ Ⅰ Ⅱ Ⅲ Ⅳ Ⅰ Ⅱ Ⅲ Ⅳ Ⅰ 2010 2012 2014 2016 2018
2015 2016 2017 2018

Source: Korea International Trade Association; The Bank of Korea

 23

Korea Macroeconomic Outlook

Economic Outlook for 2018-2019

(YoY, %, $100 million)
2016 2017p 2018 2019
Yearly Yearlyp 1H 2H Yearly Yearly
GDP 2.9 3.1 2.9 2.8 2.9 2.7
(SA QoQ) (0.9) (0.7)

Private Consumption 2.5 2.6 3.1 2.5 2.8 2.6

Facilities Investment -1.0 14.6 5.1 1.9 3.5 1.0
Construction Investment 10.3 7.6 1.2 -1.5 -0.2 -2.6
IPP Investment 3.5 3.0 3.8 3.7 3.8 4.0
Goods Exports (Volume) 2.1 3.8 3.3 4.0 3.7 3.5
Goods Imports (Volume) 3.3 7.4 3.6 3.1 3.4 2.3
Current Account 992 785 297 372 669 726

Balance of Goods 1,189 1,199 551 599 1,151 1,229

(Exports, %) (-5.7) (12.8) ( 9.5) ( 9.2) ( 9.3) (4.3)
(Imports, %) (-6.6) (16.4) (12.6) (12.8) (12.7) (3.7)

Balance of Services,
Primary〮
Secondary Income -197 -414 -255 -227 -482 -503
CPI Inflation 1.0 1.9 1.5 1.8 1.7 1.6
Core Inflation 1.6 1.5 1.3 1.6 1.5 1.6
Unemployment Rate 3.7 3.7 4.1 3.3 3.7 3.7
(SA) (3.7) (3.6)
Note: p denotes preliminary.
 24

2018-2019 Korea Economic Outlook

Korea is projected to grow 2.9% in 2018 and 2.7% in 2019 as exports

continue on the upward trend and domestic demand slows.

• Private consumption will see a steep growth in 2018 thanks to rising asset prices,
increased transfer payments and job policies, but this will slow gradually in 2019.
(‘18) 2.8%  (‘19) 2.6%

• Facilities investment will exhibit a relatively fast decline in growth influenced by a

moderation in last year’s exceptionally high growth in semiconductor investment.
(‘18) 3.5%  (‘19) 1.0%

• Construction investment will turn to a decrease as the civil engineering sector continues
to be sluggish and the building construction sector rapidly slows particularly in residential
housing. (‘18) -0.2%  (‘19) -2.6%

• Export growth will continue to exceed GDP growth influenced by continued steady
increases in the global economic growth rate and trade volume, although some high-
growth items will contract. (‘18) 3.8%  (‘19) 3.5%
Part-03 Structural Issues and
Policy Implications
 26

Decline in Export-led Economic Dynamism

At every expansionary point in the global economic cycle, Korea grew

fast on the back of global competitiveness of leading export industries.
Such economic dynamism has faded since the global financial crisis.

Korea’s GDP, Export and World Trade Volume

(Y ear-o n -Y ear % C h an g e)
25

20
K o rea Exp o rts
15

10

0 K o rea G D P
-5
W o rld Trad e V o lu m e
-1 0

-1 5
2000 2002 2004 2006 2008 2010 2012 2014 2016

Source: The Bank of Korea; IMF.

 27

Exports depends heavily on semiconductors

Contributions to Export Growth by Items

( Y e ar-on-Y e ar % C h ange , %p)

30
25 Vessel Steel
Petroleum Product Petrochemical Product
20
M otor Vehicles & Parts Semiconductor
15
Export
10
5
0
-5
-10
-15
Ⅰ Ⅱ Ⅲ Ⅳ Ⅰ Ⅱ Ⅲ Ⅳ Ⅰ Ⅱ Ⅲ Ⅳ Ⅰ Ⅱ Ⅲ Ⅳ Ⅰ Ⅱ Ⅲ Ⅳ Ⅰ
2013 2014 2015 2016 2017 2018

Source: Korea International Trade Association

 28

Continued uneven growth in industry

Few export industries, except for semiconductors, exhibit robust

performances that keep pace with a global economic recovery.

Production Growth by Industries in 2018

(U n it: % )
40

30 2017 2018

20

10

-1 0

-2 0

-3 0

-4 0
M o to r Sh ip b u ild in g G en eral Steel Tele Petro Textiles H o u seh o ld Flat Sem ico n d u cto rs Fo o d
veh icle m ach in ery co m m u n icatio n ch em icals ap p lian ces p an el an d
eq u ip m en t d isp lay b everag e

Note: Based on finished vehicle (motor vehicles), tonnage (shipbuilding), steel materials (steel) and three main
subsets (petrochemicals). Other sectors are amount based.
Source: Korea Institute for Industrial Economics & Trade, Nov. 2017.
 29

Delayed Improvement in Employment

The recent economic recovery is mostly due to IT-related sectors

(semiconductors) and thus limited ripple effect on employment.

Employed Persons Change by Industries

(Y ear-o n -Y ear C h an g e, Ten Th o u san d Perso n s)

100
To tal
80 M an u factu rin g
Services
60
C o n stru ctio n
40

20

-2 0
Ⅰ Ⅱ Ⅲ Ⅳ Ⅰ Ⅱ Ⅲ Ⅳ Ⅰ Ⅱ Ⅲ Ⅳ Ⅰ Ⅱ Ⅲ Ⅳ Ⅰ

2014 2015 2016 2017 2018

Source: Statistics Korea.

 30

Aging and Productivity Problem

Working age Population and

Total Factor Productivity
Old age Dependency Ratio
(million persons) (% p)
(백만명) (% )
40 100 5

노년부양비(우축)
80 4

37.6(’16)
60 3

30 Working age
생산가능인구(좌축)
Population (left) 40 2

20 1
Old age
Dependency Ratio
20 (right) 0 0
1990 2005 2020 2035 2050 2065 1981~1990 1991~2000 2001~2010 2011~2016

Source: Statistics Korea. Source: KDI.

 31

Growth Potential

Prospects for Potential Growth Rate in Korea(%, %p)

Years Real GDP Capital Labor TFP

Source: KDI.
 32

Policy Recommendations

Korea’s macroeconomic policies require a continued accommodative

stance for the time being as the current economic recovery still lacks a
virtuous cycle such as strong employment.

In the mid-term, restructuring efforts must continue to resolve pending

challenges such as unbalanced growth between industries and weak job-
creation capacity.

In addition, policy discussions on the balanced growth of manufacturing

and services and strengthening the competitiveness of the service
sector need to be held in earnest to increase the likelihood of creating a
virtuous cycle in which higher domestic demand leads to more value added.
Thank You !
<Appendix>
 35

Low inflation in Asia

Core inflation remains below inflation targets in many Asian

economies.

Inflation Target versus Headline and Core Inflation (2017)

(%)

Source: IMF.
 36

Low inflation in Asia

Inflation in developing Asia is forecast to rise from 2.3% in 2017 to 2.9%

in 2018 and 2019, mainly on strong consumer demand and rising global
commodity prices, but remain well below its 10-year average of 3.7%.

Inflation in Developing Asia

(%)

Source: ADB.
 37

Japanese Labor Market

The employment situation continued to improve with a trend toward
growing in regular employment, indicating both quantity and quality
improvement. However, despite of labor shortage, the rate of real
wage increase was relatively slow.
Number of Persons Holding Jobs Real Wage Increase and Open-to-
<difference from a year earlier> Applicant Ratio

(1 0 ,0 0 0 p erso n s) (% ) (ratio )
150 3 .0 1 .7
N o n -reg u lar em p lo yee
R eal w ag e In crease
120 R eg u lar em p lo yee 2 .0 (Left) 1 .6
To tal N u m b er o f Em p lo yees
90 1 .0
1 .5
60 0 .0
1 .4
30 ` -1 .0
1 .3
0 -2 .0
O p en -to -A p p lican t
-3 0 R atio (R ig h t) 1 .2
-3 .0

-6 0 -4 .0 1 .1
I II IIIIV I II IIIIV I II IIIIV I II IIIIV I II IIIIV I II IIIIV I 6 9 12 3 6 9 12 3 6 9 12 3
2012 2013 2014 2015 2016 2017 2018 2015 2016 2017 2018

Source: MHLW.
 38

Outlook on Japanese Economy

Major Outlook agencies forecasted that Japanese economy will continue

to grow moderately with global economy expansion in 2018, but likely
slow down in 2019 due to the shrink in investment demand and
consumption tax hike.

Japan GDP Growth and Outlook of 2018, 2019

(% )
6 .0
G D P G ro w th
Fo recast
IM F
4 .0
O EC D
1 .7 1 .5
2 .0 1 .1

1.2
0 .0 0.9

-2 .0

-4 .0

-6 .0
1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2018 2019

Source: Japan Cabinet Office, IMF, OECD.

 39

Chinese investment has been sluggish

Manufacturing investment growth has been slowed down since 2016

due to its structural restructuring, but recently private enterprise
investment has recovered slightly.

• Capacity utilization rate has improved significantly since restructuring.

Investment by Enterprise and

Investment by Economic Activity
Capacity utilization rate
(Y ear-o n -Y ear % C h an g e) (Y ear-o n -Y ear % C h an g e) (% )
30 45 79
Fixed asset in vestm en t State O w n ed En terp rises (Left)
25 M an u factu rin g 78
P rivate En terp rises (Left)
Services 30 C ap acity u tilizatio n rate (R ig h t)
77
20
76
15 15
75

10
74
0
5 73

0 -1 5 72
Ⅱ Ⅲ Ⅳ ⅠⅡ Ⅲ Ⅳ ⅠⅡ Ⅲ Ⅳ ⅠⅡ Ⅲ Ⅳ ⅠⅡ Ⅲ Ⅳ Ⅰ Ⅱ Ⅲ Ⅳ Ⅰ Ⅱ Ⅲ Ⅳ Ⅰ Ⅱ Ⅲ Ⅳ Ⅰ Ⅱ Ⅲ Ⅳ Ⅰ Ⅱ Ⅲ Ⅳ Ⅰ

2013 2014 2015 2016 2017 2018 2013 2014 2015 2016 2017 2018

Source: CEIC.
 40

Outlook on Chinese Economy

Major Outlook agencies forecasted that Chinese economy is set to

soften somewhat in 2018~19, as investment slows and greater
emphasis is put on the quality rather than the pace of growth.

China GDP Growth and Outlook of 2018, 2019

(Y ear-o n -Y ear % C h an g e)
10
Fo recast

G D P G ro w th 6.9
7 6.7
IM F
O EC D 6.6 6.4
6
2011 2012 2013 2014 2015 2016 2017 2018 2019

Source: CEIC; IMF; OECD.