Abstract
The Korean economy is slowing in the face of strong global headwinds. It is projected to bottom out during the course of 2012, regaining momentum towards the end of the year, in line with the global recovery. The main short-term risk to the outlook is a further intensification of the euro area crisis and its spillover. Parliamentary elections took place in April and the presidential election is scheduled for December, making 2012 a year of political transition.
1. This statement provides additional information that has become available since the circulation of the staff report. This information does not change the thrust of the staff appraisal.
2. Recently released data reinforce the assessment in the staff report that there remain downside risks to the baseline growth projections. External weaknesses have continued to drag down Korea’s exports. July trade data show that exports declined by 8.8 percent year-on-year after rising by 1 percent in June, driven by falling exports to China and the European Union. Imports also showed weakness, contracting by 5.4 percent year-on-year in July. Domestic demand indicators also softened in July as retail sales (at the discount chains) declined 8.2 percent year-on-year and domestic car sales fell 2.9 percent.
3. Inflationary pressures have declined faster than previously anticipated. Headline inflation fell from 2.2 percent year-on-year in June 2012 to 1.5 percent in July, far below market consensus. However, inflation expectations have declined only slightly to 3.6 percent in July 2012, remaining above the central inflation target. As mentioned in the staff report, normalization of the policy rate should resume once the output gap starts to close and this may now happen somewhat later in 2013 than previously expected.
4. Consistent with the authorities’ plan to achieve a “soft landing,” the growth of household debt has continued to moderate. Household debt grew by 5.6 percent year-on-year in the second quarter of 2012, slowing from 7 percent in Q1. Even though the growth of household debt has been on a declining path since Q2 2011, the still elevated level of debt remains a concern.
5. The government announced an average increase in the electricity tariff of 4.9 percent on August 3. The ministry commented that while an increase of more than 10 percent is warranted by the increase in the price of fuel used for power generation, this year’s price increase has been restrained by the need to minimize the burden on households and the negative impact on firms, in the face of difficult economic times.