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Economic growth continued at a moderate pace in 2016, supported by a supplementary budget and record low interest rates. Growth is projected to edge up from 2¾ per cent in 2016-17 to 3% in 2018. Inflation is projected to converge to the central bank's 2% target by 2018, and the current account surplus to remain large at 6½ per cent of GDP.
The Bank of Korea reduced its policy rate to an all-time low of 1¼ per cent in mid-2016. Concerns about rapidly rising household debt suggest fiscal policy may now be better placed to take some of the burden. The planned budget consolidation in 2017 will restrain growth. Instead, to support growth, government spending should be increased beyond the levels set in the National Fiscal Management Plan. In addition, structural reforms are needed to boost productivity and labour participation as the working-age population begins to decline.
Korea's persistent government surpluses and low public debt (around 45% of GDP) provide ample scope to increase spending in the near term, focusing on measures that would support its growth potential and social inclusion. The fiscal framework should be improved to provide more scope for short-term flexibility while maintaining a sound fiscal position, as Korea faces the most rapid population ageing in the OECD and the cost of possible rapprochement with North Korea.
Economic Survey of Korea (survey page)