South Korea: Country outlook
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- Economist Intelligence Unit
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- Economy, Outlook, Forecast, Overview
- Political Geography
- South Korea
South Korea: Country outlook
FROM THE ECONOMIST INTELLIGENCE UNIT
POLITICAL STABILITY : The president, Moon Jae-in of the liberal-leaning Minjoo Party, will serve out his constitutionally stipulated single five-year term to 2022. He was elected with a strong mandate in 2017 after the impeachment of his predecessor, Park Geun-hye (2013-17). The political outlook will be largely stable in 2021-25. Minjoo commands a strong majority in the National Assembly, the country's unicameral parliament, following its landslide victory in the April 2020 election, although public support for both the party and the president has since subsided. This decline has stemmed from the increasing economic and societal trade-offs in terms of prioritising control over the coronavirus (Covid-19), particularly during several recurring outbreaks. Controversies have also arisen from various government scandals, particularly a recent case of alleged profiteering by employees of a state housing agency. Moon Jae-in's government will strive to expedite the rollout of the coronavirus vaccine to boost economic recovery and employment in the last year of his term. It will also use regulatory measures to curb growth in housing costs to revive Minjoo's popularity ahead of the presidential election. The relationship between the government and the ruling party will remain stable, as both will focus on bolstering Minjoo's chance of retaining the presidency.
ELECTION WATCH : Minjoo enjoys dominance of the parliamentary agenda and legislative process, controlling 174 of the 300 seats in the National Assembly. The largest opposition party, the People Power Party (PPP), has 103 seats. The next general election is due in 2024; The Economist Intelligence Unit expects Minjoo to remain the largest party, although its seat tally will decrease as a result of growing public support for the conservative opposition and minor centrist parties.
INTERNATIONAL RELATIONS: Inter-Korean relations will remain largely fraught in 2021-25. However, tensions will ease in 2021 owing to renewed interest in denuclearisation talks from both sides. Moon Jae-in's government will continue to emphasise diplomatic engagement in its policy towards North Korea and will push for an official agreement to end the Korean War. North Korea will be receptive to these efforts in view of the possibility of economic aid from South Korea, which would ease domestic pressure resulting from its pandemic-induced recession and food shortages. Meanwhile the US administration, under the presidency of Joe Biden, will be open to negotiations with North Korea, with a view to defusing the state's military threat.
POLICY TRENDS: South Korea's efforts to combat the coronavirus involve a combination of mass testing, contact tracing, targeted quarantines and a multi-tier social distancing system. We expect intermittent local-level containment measures to persist in 2021, with broad success, before mass immunity (which we define as the vaccination of 60% of the population) is achieved by early 2022.
ECONOMIC GROWTH: In 2021 South Korea will become one of the first OECD countries to restore its economy to its pre-coronavirus size. Real GDP will grow by 3.2% as the country's export-oriented economy benefits from strong growth in outbound shipments of semiconductors, consumer electronic devices and healthcare products. Robust overseas orders will also boost domestic industrial investment in facilities and equipment. A recovery in domestic activity will be enabled by effective yet relatively less disruptive virus-control measures.
INFLATION: We forecast that consumer prices will rise by 1.5% in 2021 as a recovery in private consumption mirrors improvement in the public health situation, along with relaxed social and economic restrictions. Food prices will grow strongly as a result of disrupted production in 2020. Inflationary pressure will also come from the supply side, amid the surging cost of industrial inputs (including petroleum products and mineral commodities). Rising freight costs, due to increasing global trade flows, will also push up prices of imported goods.
EXCHANGE RATES: South Korea's currency, the won, came under depreciatory pressure in early 2021, owing to rising bond yields and a new wave of domestic coronavirus infections. Consequently, the exchange rate moved from W1,086.7:US$1 at the beginning of 2021 to around W1,130:US$1 in late March. We expect the won to strengthen against the US dollar in the second half of this year, on the back of improving economic conditions and a wide current-account surplus, reaching W1,122:US$1 by year-end.
EXTERNAL SECTOR: Merchandise exports will recover in 2021 as global trade growth picks up from its trough in 2020. South Korean electronic devices and healthcare products will remain in high demand, and outbound shipments of vehicles and automotive parts will also recover. However, the external sector will remain vulnerable to intensifying US-China conflict in trade and technology, as well as to increasing competition from regional neighbours, including China, especially in the electronics and automotive industries.
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