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Korea.

Following the severe contraction in late 2008, Korea has achieved one of the earliest and strongest recoveries in the OECD area, led by exports and expansionary fiscal policy. While the impact of fiscal stimulus will fade in 2010, a sustained pick-up in exports is projected to help boost output growth to 4 to 4 1/2 per cent in both 2010 and 2011, with a rebound in domestic demand and a marked fall in unemployment.

As the recovery takes hold, the growth of government spending should be scaled back to bring the budget back into balance, in line with the mid-term fiscal management plan. Other exceptional measures to stabilise the economy, such as the expanded support to small and medium-sized enterprises, should be phased out. Structural reforms to enhance productivity, notably in the non-manufacturing sector, are needed to sustain growth over the medium term.

The strong economic recovery, led by exports and fiscal stimulus ...

Korea has rebounded strongly after suffering one of the sharpest output declines in the world in the final quarter of 2008 and an unprecedented drop in exports. In contrast, Korean exports expanded at a double-digit rate during the first three quarters of 2009 despite the contraction in world trade. The marked decline in the won, which by March 2009 had fallen 35% below its level at the beginning of 2008 in trade-weighted terms, aided this performance. Buoyant exports were accompanied by a recovery in domestic demand, thanks in part to fiscal stimulus, which at 6% of GDP was the largest among OECD countries adopting explicit crisis-driven stimulus programmes. Additional government spending, amounting to 3% of GDP, helped to boost construction investment, while transfers to households supported private consumption, despite rising unemployment. Tax reductions, including a cut in car-related taxes, also boosted private consumption in the first half of 2009. Stockbuilding is making a large positive contribution to growth in the second half of the year, reversing the negative impact from the rundown in inventories during the first half of 2009.

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... and aided by measures to promote financial-market stability ...

The recovery was bolstered by measures to counter the financial market instability that resulted from large capital outflows, which had led to sharp fails in asset prices and the exchange rate. Recapitalisation using public funds has strengthened the banking system and the government established a 40 trillion won fund (3.8% of GDP) to purchase banks' non-performing loans and troubled assets of companies under restructuring. The cut in the policy interest rate, from 5 1/2 per cent in August 2008 to 2% in February 2009, was accompanied by generous provision of liquidity. Since March 2009, capital has been flowing back to Korea and the exchange rate has appreciated by about 15% in effective terms, while equity prices have risen by around 60%.

... is projected to boost output growth to around 4 1/4 per cent in 2010-11

As exports approach pre-crisis levels, the impact of fiscal stimulus fades and the rebuilding of inventories is completed, the pace of output growth will moderate from the 8% rate achieved during the first three quarters of 2009. The mid-term fiscal management plan calls for the consolidated central government budget, which is expected to record a deficit of 5% of GDP in 2009 (excluding the social security surplus), to return to balance in 2013-14, limiting gross public debt to less than 40% of GDP. In addition, maintaining inflation in the central bank's target zone of 2.5% to 3.5% is likely to require a hike in the policy interest rate, which is now negative in real terms. Nevertheless, the expansion will be sustained, helped by continued export growth. Indeed, with the exchange rate still far below pre-crisis levels, Korea is well-placed to continue gaining market share as world trade picks up. A sustained expansion in exports should lead to faster growth in business investment and employment, boosting output growth to 5% by late 2011.

Risks remain high but have become more balanced

An export-led expansion is vulnerable to developments in the global economy. If world trade were to falter or there were a large and rapid appreciation of the won, Korea could be at risk of a double-dip recession. On the other hand, a faster-than-expected rebound in world trade would lead to a stronger upturn in Korea. On the domestic side, the heavily-indebted household sector may use income gains to improve balance sheets rather than increase consumption, thereby slowing the recovery.
Korea: Demand, output and prices

                           2006

                         Current    2007   2008   2009   2010    2011
                          prices
                           KRW         Percentage changes, volume
                         trillion            (2005 prices)

Private consumption       494.9      5.1    0.9    0.2     2.9    3.2
Government consumption    131.9      5.4    4.2    5.8     3.0    4.1
Gross fixed capital       260.7      4.2   -1.7   -1.7     3.6    4.9
 formation
Final domestic demand     887.5      4.9    0.7    0.5     3.1    3.8
  Stockbuilding (1)         8.7     -0.2    0.7   -5.0     1.6    0.0
Total domestic demand     896.1      4.7    1.4   -4.5     4.9    3.9
Exports of goods and      360.6     12.6    5.7   -0.1    13.4   12.9
 services
Imports of goods and      348.0     11.7    3.7   -8.2    15.1   12.5
 services
  Net exports (1)          12.6      0.5    0.9    4.4    -0.4    0.3
GDP at market prices      908.7      5.1    2.2    0.1     4.4    4.2
GDP deflator                --       2.1    2.7    2.8     0.4    2.0
Memorandum items
Consumer price index        --       2.5    4.7    2.7     2.8    3.0
Private consumption         --       2.0    4.2    2.5     2.8    3.0
 deflator
Unemployment rate           --       3.2    3.2    3.8     3.6    3.4
Household saving            --       2.9    2.8    3.9     3.0    3.2
 ratio (2)
General government
 financial balance (3)      --       4.7    3.3   -1.8     0.4    1.1
Current account             --       0.6   -0.6    4.6     1.3    1.0
 balance (3)

Note: National accounts are based on official chain-linked
data. This introduces a discrepancy in the identity between
real demand components and GDP For further details see OECD
Economic Outlook Sources and Methods (http://www.oecd.
org/eco/sources-and-methods).

(1.) Contributions to changes in real GDP (percentage of real
GDP in previous year), actual amount in the first column

(2.) As a percentage of disposable Income

(3.) As a percentage of GDP.

Source: OECD Economic Outlook 86 database

StatLink http://dx.doi.org/10.1787/753666706071
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Title Annotation:Chapter 3: DEVELOPMENTS IN INDIVIDUAL OECD COUNTRIES
Publication:OECD Economic Outlook
Article Type:Statistical data
Geographic Code:9SOUT
Date:Nov 1, 2009
Words:1096
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