Korean economy

The Korean economy (한국경제/韓國經濟) has shown a comparatively steady growth since the IMF Crisis with such issues as sporadic financial crisis and jobless growth unresolved.

Economic developments in the 2000s at a glance may be described as "shift to stable growth".

Key words
economy, crisis, jobless growth, inflation, current account

Shift to Stable Growth
After having successfully overcome the financial crisis, the Korean economy continued to grow steadily and remained favorable overall until 2007, with consumer prices stable and the current account remaining in surplus.

The economy grew at an annual rate of 4.7% during the period of 2001~2007. This figure represented a slowdown compared to growth rates recorded in the 1990s, but still constituted stronger growth than other OECD member countries. The GNI per capita registered 21,632 US dollars in 2007, exceeding 20,000 US dollars for the first time in 12 years after having broken through the 10,000 US dollar level in 1995.

Credit Card Crisis
However, measures to encourage credit card transactions and stimulate the real estate market that were under taken in a bid to boost domestic demand, which had contracted in process of overcoming the currency crisis, brought about such side effects as a rise in credit delinquents, growth in household indebtedness and an increase in housing prices and worked as a factor undermining economic stability.

The government and the Bank of Korea made strenuous efforts to keep the liquidity crisis triggered by the credit card distress from spreading throughout the entire financial system and to impose tighter requirements for household loans to prevent an increase in household debts from dragging down financial institutions.

Jobless Growth
Meanwhile, the phenomenon of 'jobless growth', with the unemployment rate rising and the number of job openings increasing at a slower pace, emerged in the labor market, reflecting structural changes in the Korean economy since the currency crisis. Youth unemployment has emerged as a serious issue, as more job seekers, particularly the young, are suffering in the search for a job.

Subdued Inflation
The average annual consumer inflation rate registered a rise of 3.1% during 2001~2007, less than half that in the 1990s. Amid abating global inflation caused by progress in the industrialization of emerging markets including China, and globalization, improved productivity engendered by intensified competition both domestically and abroad and the enhanced effectiveness of monetary policy contributed to a stable and downward trend in inflation.

Current Account
The current account continued to follow a stable surplus underlying trend on the back of high economic growth in emerging markets, including China, and the economic recovery in advanced countries.

Consequently, Korea's official foreign reserves, which had stood at a mere 20.4 billion US dollars at the end of December 1997, right after the outbreak of the financial crisis, soared to 262.2 billion dollars at the end of 2007, resulting in a sharp expansion of the external payment capacity.

This has served as a solid foundation for Korea in seamlessly overcoming the global financial crisis from 2008 onwards.

Global Financial Crisis
The instability in global financial markets originally triggered by the subprime mortgage debacle in the United States in 2007 developed into a global financial crisis following the bankruptcy of Lehman Brothers in September 2008, which came as a big shock to the Korean economy.

With the credit crunch deepening, turmoil arose in financial markets. For instance, stock prices and the exchange value of the won against the US dollar plunged and the CDS premium on Korea's sovereign debt soared. The real economy deteriorated rapidly, as gross domestic product (GDP) fell dramatically in the fourth quarter of 2008 in response to the drying-up of domestic and overseas demand.

Financial and Fiscal Policy
The government and the Bank of Korea made a proactive policy response both to address the anxieties in the financial markets arising from the global financial crisis and to prevent an economic slowdown. First of all, the government sought to boost domestic demand by carrying out actively cutting taxes and expanding fiscal spending through the formulation of a revised supplementary budget of historically large in scale.

The Bank of Korea also sharply reduced the Base Rate in six steps from October 2008 to February 2009, bringing it down by a total of 3.25%p to 2.0%, the lowest since May 1999, when it began to announce a target policy rate. The Bank also diversified liquidity supply channels and instruments to prevent the cash flow situation in the overall economy from worsening rapidly.

In addition, as foreign currency liquidity conditions deteriorated sharply with domestic banks facing difficulties in raising foreign currency funds after the collapse of Lehman Brothers, the government and the Bank of Korea actively pushed ahead with a measure to stabilize the foreign exchange market.

They expanded their provision of liquidity to the foreign exchange market and signed currency swap agreements with major central banks, namely the U.S. Federal Reserve, the Bank of Japan, and the People's Bank of China. This acted to ease the concerns over foreign currency liquidity shortages and to restore stability in the domestic foreign exchange market.

Latest Developments
Helped by this bold and thoroughly engaged policy response, the Korean economy began to overcome the impact of the global financial crisis from the first quarter of 2009, and showed the fastest recovery among OECD members with its GDP growth rate of 6.3% in 2010.

As the upward pressure on consumer prices was expected to increase with the growth in economic activities, the Bank of Korea raised its policy rate by a total of 1.25%p on five occasions from July 2010 to June 2011, to 3.25%. To minimize the adverse effects of rapid capital outflows, meanwhile, the government and the Bank of Korea introduced ceilings on banks’ foreign exchange forward positions in October 2010 and abolished tax exemptions on foreigner bond investment in Korea in January 2011.

Due to the worsening of global financial market instability in the second half of 2011, including the possibility of the eurozone sovereign debt crisis spreading and the concerns about global economic slowdown including in the US, the domestic financial markets began to show instability, with expanded volatility of the KOSPI and the won/dollar exchange rate.

The Bank of Korea consequently kept its policy rate unchanged, reduced the ceilings on banks’ foreign exchange forward positions in July, and implemented the Macroprudential Stability Levy prepared jointly with the government and the supervisory authorities from August. Meanwhile, in reflection of the moves toward strengthening the financial stability function of central banks in major advanced nations including the UK, the Bank of Korea Act was revised in late August, to give the Bank of Korea a clear mandate for ensuring financial stability.

Prospects
Thanks to these policy measures, the Korean economy has continued its level of long-term trend growth and its current account surplus in 2011 as well. However, consumer price inflation is at a high level around 4%, the upper limit of the medium-term inflation target, due to the combined effects of cost-side factors including rises in domestic agricultural product and global commodity prices and demand-side pressures in line with the increase in economic activity.

As for the global economy, most advanced economies slowed in 2012, due to the prolongation of the eurozone sovereign debt crisis, and the spread of its effects to emerging market economies including China.

Owing to the sluggish external demand and the worsening of investment sentiment amid greater economic uncertainty, the downside risk to Korean economic growth increased. The Bank of Korea therefore cut the benchmark policy rate on two occasions, by a total of 0.5%p. Due to the global economic slowdown, Korea’s GDP growth rate declined from 3.7% in 2011 to 2.0% in 2012. Never the less, it was the only country in the world whose sovereign credit rating was adjusted upward by the world’s top three credit rating agencies, as they assessed its macroeconomic stability to be good. Korea’s current account surplus widened to reach a record high of $43 billion, and its consumer price inflation fell sharply year-on-year. It stood at only a little above 2%.