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(New Year Special) S. Korean economy appears on track to grow 3 percent in 2018

All News 09:00 December 29, 2017

By Kim Kwang-tae

SEOUL, Dec. 29 (Yonhap) -- The South Korean economy appears likely to expand 3 percent in the new year on an upturn in global trade, but growing protectionism and the North Korea risk could weigh down Asia's fourth-largest economy, market watchers said Friday.

The International Monetary Fund has said South Korea's economic growth is forecast at around 3 percent in 2018, with private consumption growth benefiting from the sizable minimum wage increase and from policies supporting employment and social spending.

The Bank of Korea (BOK) has also forecast growth in the 3 percent range for the South Korean economy in 2018.

"The domestic economy is expected to pull off stable growth next year, but the central bank will stay expansionary on low inflationary pressure," the BOK said Thursday in a report on its annual monetary strategy for 2018.

A 3 percent economic expansion next year, if realized, would mark the first time in seven years that the economy has expanded 3 percent for the second straight year.

In the July-September period, South Korea's gross domestic product hit a seven-year high of 1.5 percent due to increased construction investment and strong exports.

The strong third-quarter performance means that South Korea is well on track to meet its growth target.

The BOK has forecast the country's annual economic growth for 2017 may reach 3.15 percent if the economy expands just 0.20 percent in the fourth quarter.

South Korea's strong exports and a modest upturn in domestic demand have also fueled expectations that the country's per capita gross national income could surpass US$30,000 next year.

(New Year Special) S. Korean economy appears on track to grow 3 percent in 2018 - 1

South Korea would become the third major country in the Asia-Pacific region to achieve the milestone after Japan and Australia.

South Korea's per capita GNI has remained under $30,000 since it breached the $20,000 mark for the first time in 2006.

As part of efforts to boost the economy, South Korea is pushing to spend over 58 percent of its budget during the first half of next year

South Korea has a track record of frontloading its budget spending to pump-prime the economy.

South Korean policymakers and private sector experts said there are some downside risks at home and abroad, including increasing trade protectionism, and tension over North Korea's nuclear and missile programs.

"Growing protectionism trends and the North Korea risk is some of the challenges facing the country," according to a recent report by the Korea Trade-Investment Promotion Agency.

South Korea and the United States are set to hold the first round of talks on Jan. 5 to amend their bilateral free trade agreement.

The bilateral trade pact -- which went into effect in 2012 -- has widely been considered a symbol of deepening economic ties, but U.S. President Donald Trump has vowed to fix or scrap the free trade deal, calling it "horrible."

(New Year Special) S. Korean economy appears on track to grow 3 percent in 2018 - 2

The North Korea risk could persist next year as Pyongyang is pressing ahead with its plans to perfect its technology for a nuclear-tipped missile capable of striking the U.S. mainland in defiance of international sanctions and pressure.

The economic fallout from the tension was evident in August when foreign investors sold South Korean stocks and bonds worth $3.25 billion, marking the first month of sell-offs since November 2016.

Tension spiked on the Korean Peninsula in August as North Korea threatened to launch ballistic missiles toward the U.S. Pacific territory of Guam. U.S. President Donald Trump said the U.S. military is "locked and loaded" to deal with North Korea's provocations and North Korea would be met with "fire and fury" if it continued to threaten Washington.

North Korean leader Kim Jong-un later held off on the launch against Guam.

The South Korean economy could moreover face challenges in 2018 over the planned hike in the minimum wage and the chronic low birthrate, as well as growing household debt, observers said.

The government has said it would provide some 3 trillion won ($2.76 billion) in aid to help small businesses deal with the minimum wage hike, but small-time entrepreneurs have warned they may have to let go of workers to save on labor costs.

The minimum wage is set to rise to 7,530 won per hour next year, up 16.4 percent from the current 6,470 won. It marks the biggest jump in about two decades.

(New Year Special) S. Korean economy appears on track to grow 3 percent in 2018 - 3

South Korea's overall household debt came to 1,419.1 trillion won at the end of September.

Last month, the BOK raised the key rate by a quarter percentage point to 1.5 percent in the first hike since June 2011, a move that could put more burden on heavily indebted households.

Adding to the woes of the South Korean economy, the number of newborns is expected to reach around 360,000 this year, breaking the current annual record low of 406,200 babies tallied in 2016, according to officials.

Such trends could lead to a drop in the economically active population, raise welfare-related outlays and generally eat into the country's long-term growth potential.

Many young people are putting off marriage as they cannot find decent jobs after finishing school, which in turn has led to a drop in income and inability to start their own families.

South Korea's total fertility rate -- the average number of children a woman bears in her lifetime -- stood at 1.17 in 2016, much lower than the replacement level of 2.1 that would allow the country's population to remain stable at 51 million.

entropy@yna.co.kr
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