S. Korea Growth Outlook Raised

South Korea’s think tank, the Korea Development Institute, raised its economic growth outlook for this year to 2.6% from its previous estimate of 2.4%, reflecting improving exports and investments. However, it pointed out protectionism in global trade and tensions with North Korea as risks for economic recovery.

The government-run economic think tank released its outlook, Tuesday, in which it announced the 2.6% growth figure. This is higher than estimates by major private research institutes, most of which suggest 2.5% or lower as the growth rate, Yonhap reported.

KDI turned more positive about the economy this year thanks to exports which have been marking double digit growth for three consecutive months.

“Exports have been improving on global economic recovery. Amid expanding demand, the semiconductor industry has been enjoying a boom,” it explained in the report. It expects exports to grow 4% this year, which contrasts with 1.9% expansion it suggested in its previous outlook.

Facility investment also increased 3.2% in January and February. The institute expects it to grow 4.3% this year, which is higher than its previous estimate of a 2.9% increase.

However, the institute stressed that it doesn’t mean that the economy is showing signs of recovery. “We raised the outlook since much of the downward risks of the previous year have eased in the global economy. It doesn’t mean we see upward momentum,” said Kim Seong-tae, head of macroeconomic research at the institute.

  Private Consumption Weak

Most of all, private consumption is still weak. Private consumption increased 1.5% in the fourth quarter last year, slowing down growth from the previous quarters. The institute expects total consumption to increase 2.2% this year, which is lower than its previous estimate of 2.3% growth.

Behind sluggish consumption are structural problems such as low income and household debt. Household monthly nominal income increased only 0.6% last year, marking the smallest increase since 2003 when the statistics office started compiling the data. Real income reflecting inflation dropped 0.4%.

Household debt that surpassed 1,300 trillion won ($1.13 trillion) is also posing a threat to the economy, especially following a key rate hike in the United States. “Households are left with little room for consumption as the interest rate is rising despite huge household debt,” Kim noted.

The economic think tank also pointed out that the job market condition is worsening. Jobs that pay well in manufacturing have been decreasing due to corporate restructuring while many workers have no other option but to start their own small businesses. The institute expects the unemployment rate to mark 3.8% this year, rising from 3.7% last year.

“Despite positive signs for improvement, there remain downward risks such as the US trade policy, overinvestment in China, Brexit negotiation in the eurozone and political uncertainties. They will all restrict recovery,” the institute noted in the report.

It added that the expansion of trade protectionism or geopolitical risks such as North Korea’s nuclear threat may prompt the economy to rapidly cool off.

  Tensions Rising

South Korea has already suffered economic damage over the Korean tensions, due to China’s economic response to its move to install the US Terminal High Altitude Area Defense missile defense system. With China representing South Korea’s largest trading partner, Beijing has flexed its economic muscles through measures such as restricting Chinese tourism to South Korea, closing Korean-owned Lotte stores and blocking imports of Korean cosmetics and TV shows.

“We don’t have to make the country bleed, but we’d better make it hurt,” China’s Global Times newspaper warned in response to THAAD, which is seen as a threat to China’s national security.

The travel ban alone could potentially cut at least 20% off South Korea’s economic growth in 2017, Credit Suisse has warned. The investment bank calculates that Chinese tour groups account for around 0.5% of South Korea’s gross domestic product.

The sanctions have hit the stock prices of South Korean consumer firms and they could be set for further damage should the risks rise further, according to political risk consultancy Eurasia.