Following a pause in mid-2012, output growth is projected to pick up gradually to around 4½ per cent by 2014, led by a rebound in exports as world trade gains momentum. Private consumption is likely to remain subdued, given the high level of household debt. Inflation, which has fallen to less than 2%, is expected to return to the central bank’s target range of 2.5-3.5%.
Achieving Korea’s medium-term fiscal target is a priority. However, if the projected recovery in the world economy fails to materialise, Korea has scope for fiscal, as well as monetary, stimulus, given its sound public finances and low inflation. Sustaining growth over the medium term requires structural reforms to boost labour force participation and productivity, particularly in services.