The biggest growth engine of the Korean economy, according to an analysis by the Organisation for Economic Co-operation and Development (OECD), is technology exports. Exports have surged since the beginning of the year, led by advanced industries such as semiconductors, with both prices and volumes rising markedly in the technology sector.
The problem is that the recovery is uneven. While semiconductor exports and private investment are driving up the growth rate, it is too early to say that the warmth of the recovery has spread to the broader manufacturing sector and domestic demand. The OECD pointed out that manufacturing sentiment in Korea, excluding semiconductors and shipbuilding, remains weak, and that consumer confidence deteriorated sharply in April.
This year's nominal growth rate is estimated at 10.4%. This figure was back-calculated by the Ministry of Economy and Finance based on the GDP deflator (nominal GDP divided by real GDP) of 7.6% presented by the OECD. As a higher nominal growth rate has the effect of lowering government debt, this can be viewed as favorable for the government's expansionary fiscal policy.
The inflation outlook improved slightly. The OECD lowered its forecast for Korea's consumer price inflation this year by 0.1 percentage point to 2.6% from 2.7%, and projected it would approach the price stability target level at 2.2% next year. The organization assessed that price caps and fuel tax cuts have been somewhat effective in slowing inflationary pressure stemming from energy supply shocks. However, it pointed out that prolonged price stabilization measures could increase side effects. While such measures help reduce the burden of energy prices in the short term, they could distort market prices and delay the normalization of inflation.
"Targeted support for vulnerable households and firms should be prioritized, while price controls, fuel tax cuts, and export restrictions should be phased out," the OECD recommended.
The OECD also identified strengthening the fiscal sustainability framework as a task for the Korean economy. Based on the OECD's outlook, the Ministry of Economy and Finance estimated this year's nominal economic growth rate at 10.4%. Reflecting this, it also lowered its forecast for general government debt as a share of GDP to 48.2% this year and 50.2% next year. Despite the high nominal growth rate, the debt ratio next year is still expected to exceed 50%.
The OECD called for strengthening the long-term fiscal sustainability framework to respond to accumulated fiscal deficits and aging pressures. It said a fiscal framework that aligns the annual budget with a long-term fiscal path is needed, and that introducing a cyclically adjusted fiscal balance ceiling and an independent fiscal institution should also be considered.
