Where is Korean economy heading?

Foreign economists expect rebound to be possible in second half

The outlook for the Korean economy has been murkier than ever due to lingering uncertainties caused by a myriad of downside risks, such as the prolonged eurozone debt crisis, concerns over the U.S. fiscal cliff and sluggish corporate investment here.

The latest economic data also suggests that Asia’s fouth-largest economy will undergo an uneven recovery in the coming year. The Bank of Korea (BOK) reported Thursday that the nation’s gross domestic product (GDP) grew 0.1 percent in the July-September period from the previous quarter, marking the slowest gain since the first quarter of 2009.

In order to foresee how the economy will unfold down the road, The Korea Times conducted email survey of five global economists ― Ronald Man of HSBC, ING’s Tim Condon, Sharon Lam of Morgan Stanley, Luca Silipo from Natixis and Wharton School professor Mauro Guillen ― on macro economy, monetary policy and foreign exchange rates.

It was conducted from Dec. 3 to Dec. 6 and shows that most foreign economists expect the Korean economy to bounce back in 2013 thanks to a strong recovery in China and the U.S.

Regarding the central bank’s monetary policy, three of them said that its wait-and-see stance of keeping its benchmark interest rate at 2.75 percent is appropriate, citing the nation’s low inflation and unemployment rate.

However, Condon believes that the country could have offset the spending shock with sufficient monetary policy easing earlier this year. Silipo argued that the central bank should lower the key rate, referring to anemic domestic demand and faltering consumption.

The economists were split over the nation’s foreign exchange policy. Man said that the country may endure further appreciation of the won thanks to its competitiveness in global markets, while Guillen argued that keeping the rate under a certain level will help the export-oriented economy.

The following discussion has been reconstituted based on separate email interviews.

Economic growth

Q: How do you expect the Korean economy to unfold next year? Will it keep the low 2-percent growth like this year, or rebound to more than 3-percent?

Man: We expect the economy to grow sequentially next year, with growth likely to exceed market expectations in the second half of 2013. Our forecast for the year is 3.8 percent, which is currently above consensus.

Guillen: It depends on how its main export markets do ― China for producer goods and the U.S. for consumer goods. There is uncertainty, but the signs from China are now good, and hopefully the fiscal cliff crisis in the U.S. will get resolved.

Condon: Our forecast for 2013 real GDP growth is 3.4 percent in line with our estimate of trend growth. We think the investor-friendly turn in the U.S. and eurozone financial policies in September significantly reduced the likelihood of spending shocks. Absent shocks, we think neutral monetary conditions will enable the economy to grow at its trend rate.

Lam: We see 2013 as a year of recovery, supported by continual improvements in exports, consumption recovery and capital expenditure. However, this recovery will likely be mild and below-trend, as the export sector is unlikely to see a V-shaped rebound given the continual sluggishness in developed markets.

We forecast Korea’s GDP growth to recover from an estimated 2.3 percent this year to 3.7 percent in 2013, however, our new forecasts are lower than our previous estimates of 2.8 percent in 2012 and 3.9 percent in 2013 due to downside surprise in capital expenditure and inventory in the third quarter.

Silipo: Because the international ― U.S., Europe, China and other Asia ― picture will remain rather tamed next year, there is little reason to hope that the Korean economy can post growth in excess to 3 percent. Also domestic demand is in a slowdown trend and this will probably continue to be the case at the beginning of next year. Only around next fall we expect some more economic dynamism starting from external demand and filtering through domestic economy. We don’t expect a return to 3 percent growth before 2014.

Monetary policy

Q: How do you evaluate the BOK’s monetary policies? Do you agree with the central bank’s wait-and-see stance, or do you think it loses the right timing to cut the key interest rate, which could boost the economy?

Man: The latest data from Korea point toward economic stabilization, led by a faster recovery in external demand. With the benefits from rate cuts delivered in July and October yet to be fully realized, the BOK’s current wait-and-see stance is most appropriate.

We believe an export-led recovery can be sustained, and therefore the next move by the central bank will likely be up. Currently, we have penciled in a 25 basis points hike in the third quarter 2013 as the central bank resumes its rates normalization process.

Lam: On the monetary front, we expect the BOK to keep policy rate unchanged at 2.75 percent in 2013. Growth rates and inflation will likely be higher in the recovery year of 2013, and thus it will be difficult for the BOK to cut interest rates. On the other hand, the recovery will likely be slow and below trend, and the conditions are not right for any interest rate hikes.

Guillen: I think it makes sense to wait and see. The reason is that unemployment is low, and therefore there is no real urgency to stimulate consumer spending or investment.

Condon: We considered monetary policy tight before the July rate cut. We think the October rate cut only made it neutral. We derive our estimate of the neutral level of the policy interest rate by adjusting its average during the previous monetary policy cycle for the change in trend nominal GDP or spending growth.

Silipo: At the moment, there are more reasons to have lower rates than to keep them stable. Domestic demand seems relatively anemic: The high frequency indicator of consumption is faltering, preluding to a low contribution of consumption to GDP growth in the third quarter. Industrial production is not accelerating as fast as expected, leading to a lower demand for investment.

Finally, real estate prices are starting to show weakness, starting from Seoul, which could be an issue of vulnerability for household balances. As indebtedness of household is mostly at a variable rate, lower interest rates would absorb part of the negative effect of a reduction in wealth.

Foreign exchange rate

Man: Our foreign exchange strategists expect the Korean won to reach 1,050 against the U.S. dollar by the end of 2013. On the export front, we believe Korean goods will remain competitive and can hold its own even if the won appreciates a bit more.

Concerns have grown over Korea’s exports given the recent strength of the Korean won, especially against the Japanese yen. But step back a bit. There’s still some distance to go before the yen-won rate reaches pre-2008 levels.

Guillen: Korea has almost no inflation, and it has been coming down, and it does not rely on inflows of foreign investment for growth. Given that it is a very export-oriented economy, keeping the won at a competitive level seems like a good idea. A stronger won should not be a priority.

Condon: The weak-spending-wide-surplus dynamic will fade as spending returns to trend. However, this will take time and we forecast cold money driving the won-dollar exchange rate to 1,055 by the mid-2013..

Silipo: The current level of the Korean won is very strong and reflects the stability of the Korean economy but also the continued excess global liquidity fueled by ultra-expansionary monetary policies implemented by the major central banks.

As we believe that these policies will remain in place well into next year there is no short term reason for the won to depreciate. However, starting from spring we should see a generalized strength in the U.S. dollar due to economic recovery there and a further narrowing of trade deficit. Therefore, the second half of the year should be characterized by a gradual depreciation of won against dollar. <The Korea Times/Kim Jae-won>