Korea’s 2H economic growth, dampened to 1.9% owing to the Brexit uncertainties

We had lowered our forecast for Korea in 2016 0.3%p to 2.3% since the last release. From the beginning of this year, external headwinds had been strong thanks to Chinese economic slowdown and opened possibility of US Fed base rate hike. In the meantime, the unexpected UK’s Brexit broke out; thus we expect that Korea’s 2H growth lowers down to 1.9% which is slower than 1st Half (2.7%). Moreover, domestic polices to revert the economy up could partially setoff the Korean economic slowdown; however only to a limited rise due to majority take-over of the opposition party and major industrial restructuring policies undergoing.

Consumer price, leveled down to 1.2% from former forecast 1.4%

The upbeat of USD/KRW and international crude oil price would help 2nd half consumer price to rise, although the overall yearly CPI is expected to lower down than the former forecast by 0.2%p. In addition, current account surplus is projected to decline by a small margin to US$99.1 billion from US$105.9 billion (2015). The maintenance of current account surplus stems from lingering recession type surplus; this year export and import loss forecasted to be -4.6%, -5.4% relatively. USD/KRW is expected to show rising trajectory to 1,191 won yearly owing to the heightened international financial market volatility after the Brexit event. The market interest rate (Corp, AA-, 3yr) would show downbeat trajectory thanks to the delay of US base rate hike and Korean base rate cut pressure. 

Korean economy, highly likely to reenter the downturn phase thus supplementary budget and other pump-priming policies necessary

An uneasy drop of potential growth rate is expected as long term trend of real GDP has only grew by 8.9% since 1st quarter of 2013, which is only 60% recovery level than the average growth rate since 1996. Also, analyzing the economic cycle phase of Korean economy, the Korean economy has thought to pass the trough in 1st quarter of 2013 and expand, however the phase is worrisome as it shows signals of entering the slowdown again. As a result, we highly recommend short term stimulus be carried over with long term view policies as well to develop the economic structure and health.