- Growth seen to rebound from negative 0.9% last year to 3.9% in 2021 and 3.0% in 2022 on the back of a solid recovery in exports and domestic investment
- Exports will continue to be the main driver of growth with solid recovery across sectors
- The uneven recovery between manufacturing and services will continue, as risks surrounding face-to-face services remain high
- The economy contracted by 0.9% in 2020, less severe than most advanced economies, as containment measures in the first wave of the pandemic were calibrated and targeted
The South Korean economy continues its robust rebound in 2021, propelled by a strong global recovery and robust demand for electronics, autos and other manufactured products, according to a new report from the ASEAN+3 Macroeconomic Research Office (AMRO).
AMRO in its 2021 annual report on South Korea published August 23 said the country’s economy has been on a recovery path after a sharp contraction in the second quarter of 2020.
Growth is expected to rebound from a 0.9% contraction last year to 3.9% in 2021 and 3.0% in 2022 on the back of a solid recovery in exports and domestic investment.
The economic contraction of 0.9% in 2020 is less severe than in most advanced economies, as containment measures in the first wave of the pandemic were calibrated and targeted, the report said.
Information and communication technology (ICT) and automotive exports were the main drivers of economic recovery in the second half of 2020, especially ICT, which benefited from a surge in demand for electronic equipment for telework globally. In contrast, face-to-face services were hit hard by containment measures.
Domestically, facilities investment picked up robustly in the second half of 2020, also led by the ICT industry, while construction started to recover only toward the year end. Private consumption was dragged down by a resurgence of the pandemic, although universal cash handouts helped to shore up spending somewhat.
By GDP component, exports will continue to be the main driver of growth with solid recovery across sectors. Facilities and construction investment are expected to rebound on the back of the export recovery, a booming housing market and an expanded budget for social overhead capital.
On the other hand, private consumption will likely post a slow recovery due to the drag from uncertain employment prospects and rising household debt.
By sector, the uneven recovery between manufacturing and services will continue, as risks surrounding face-to-face services remain high. Small and medium enterprises (SMEs) and small merchants in those sectors may see a delayed recovery.
The labor market has improved, although social distancing measures and cross-border travel restrictions continue to dampen employment, especially in the services sector.
A well-targeted containment strategy supported by large economic stimulus packages has helped to keep the infection rate under control and mitigate the adverse economic impacts of the pandemic. The large comprehensive package of fiscal, monetary and financial regulatory measures has helped support the economy when social-distancing measures were tightened. Emergency support measures to hard-hit industries and small entrepreneurs have curbed business bankruptcies and mitigated job losses.
Looking ahead, uncertainties around the COVID-19 pandemic containment, the US-China trade conflict, and household indebtedness could undermine Korea’s growth momentum, AMRO said.
The government’s continuing efforts to achieve more inclusive growth and strengthen growth potential are welcome. The Korea New Deal initiative to support a green and digitalized economy, nurture new growth engines and expand the social safety net is a strategic and timely plan for the post-pandemic period. However, structural reforms in the services sector and the labor market should be stepped up in order to enhance the productivity and competitiveness of small enterprises and low-skilled labor, it added.
AMRO is an international organization established to contribute towards securing macroeconomic and financial stability of the ASEAN+3 region, comprised of the 10 members of the Association of Southeast Asian Nations (ASEAN) and China, Hong Kong, Japan, and Korea.