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South Korea: Country Economic Forecast: 06 Feb 2012

11 Pages Oxford Economics SKU: OFE6799185

Although the news on two of Korea's key trading partners, China and the US, has been reasonable over the last month, the unexpected weakness in consumer spending in 2011Q4 suggests a degree of fragility in the domestic economy that means the risks are still skewed to the downside. Consumer spending fell 0.4% on the quarter in Q4, the first drop since 2009Q1, despite a still fairly healthy labour market. And while we assume that this was a one-off decline, consumption is now expected to grow only 2.1% in 2012 compared to 2.8% last month. Meanwhile, though the external picture is not as bad as the January drop in exports (distorted by base effects) would suggest, it is not good enough to prevent firms having to cut back on the inventories built up in Q4. As a result, industrial output is likely to shrink further in Q1 and quarterly GDP growth will be marginal at best in this period. But looking forward, growth should accelerate as the headwinds ease, with GDP now forecast to expand 2.8% in 2012 as a whole compared with the 3% expected last month. The economy should receive a lift from higher infrastructure spending this year and, given its budget surplus last year, the government could boost the economy further if necessary (by cutting taxes for example). Given that inflation is still above target, a greater fiscal stimulus would seem more appropriate than cutting interest rates, but the possibility of the latter has increased with the domestic weakness evident in Q4.

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South Korea: Country Economic Forecast: 06 Feb 2012

Oxford Economics

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