2012-11-15 00:42:54 - South Korea Business Forecast Report Q4 2012 - a new country guide report on companiesandmarkets.com
We expect South Korea´s real GDP growth to slow to a belowconsensus 1.9% in 2012. China has recently lowered its GDP growth forecast, while our core view of a eurozone recession remains firmly in play. Disinflation has clearly started to take hold and further weakness in the domestic economy is likely to place further downward pressure on prices. As inflation continues to ease, the central bank is likely to have more room to enact further monetary easing. Consequently, we are pencilling in at least one more 25-basis-point rate cut in the coming months.
The domestic property market is likely to remain weak through much of 2012 amid the bleak economic landscape. A supply overhang and the country´s perennial household debt situation
are also likely to keep downward pressure on prices. Pledged increases in welfare expenditure that politicians have used as a vote-buying tactic will be funded by debt, given that budgetary adjustments and tax increases are likely to be out of the question. As a result, the country´s fiscal position is likely to come under pressure should the government allow welfare expenditure to rise unchecked. Despite Moody´s upgrading of the country´s sovereign credit rating, we remain less optimistic of South Korea´s fiscal fundamentals.
The household balance sheet has started to deteriorate and we expect further worsening as the unwinding of household debt gains pace. A sharp deterioration in the country´s public finances is likely to ensue, and we consequently expect to see a re-pricing of sovereign risk. Forecast Changes We expect the economic weakness to extend into 2013 and have seen fit to downgrade our growth expectations to 3.0% from a previous estimate of 4.5%. The revision sees downward adjustments across all growth components, with the largest changes seen in private consumption and net exports. We continue to see the latter as the main drag on growth in 2013.
Key Risks To Outlook
Downside Risks To Economic Growth Forecast: Should we see a sharper-than-expected downturn in the global economy or even an implosion in South Korea´s household debt market, we would certainly expect to see a substantial weakening in its exports sector, which, in turn may push the economy into a pronounced recession
Downside Risks To Monetary Policy Forecast: In the event that the economy worsens beyond expectations, while deflationary concerns come to the fore, the central bank is likely to enact a more aggressive monetary stance.
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