Output growth is projected to be 2.7% in 2016, reflecting weak external demand and fiscal tightening, with inflation around 1%. With stronger external demand in 2017, growth is projected to pick up to about 3%, in line with potential. The current account surplus will remain high at 7½ per cent of GDP.
Government spending is set to rise less than 1% in 2016. Given its budget surplus and low debt, Korea should introduce a supplementary budget to provide some stimulus. Inflation has undershot the target since 2012, suggesting scope to cut the policy interest rate, although the central bank needs to take high household debt and the risk of capital outflows into account.
Korea’s labour productivity growth was the fastest in the OECD during the past 25 years, but the level of labour productivity is still only 55% of the average of the top half of OECD countries, reflecting weak productivity in services. Product market regulation is among the most stringent in the OECD area. The government is addressing the causes of low productivity through its Three-Year Plan for Economic Innovation launched in 2014. Policies to break down labour market dualism would encourage firm-based training, thereby boosting productivity.
Economic Survey of Korea (survey page)
The Economic Consequences of Brexit: A Taxing Decision (main web page with paper)
Structural reforms in a difficult time (blog + paper)
Public spending efficiency in the OECD (blog + paper)