The economy was hit by two shocks in 2015 - an outbreak of the Middle East Respiratory Syndrome (MERS) and a marked slowdown in demand from China and other Asian countries – that reduced output growth to around 2¾ per cent. While the MERS outbreak has been resolved, weaker demand from Asia remains a headwind to growth. Nevertheless, a pick-up in private consumption is projected to increase output growth to 3% in 2016 and 3½ per cent in 2017, while inflation rises to around 2%.
The 2015 fiscal stimulus ought to be supplemented by further measures in 2016. With inflation far below the target range of 2.5% to 3.5%, an additional cut in the policy interest rate would be beneficial. The top policy priority should be wide-ranging structural reforms, including those in the 2014 Three-year Plan for Economic Innovation, to sustain Korea’s growth potential in the face of rapid population ageing and to make growth more inclusive.
Korea continues to promote green growth, launching a second five-year plan and an emissions trading system in 2015 and boosting public investment in green technology. Nevertheless, greenhouse gas emissions and energy intensity rose during the 2009-13 green growth plan. A well-functioning emissions trading system should promote investment in green technology, thereby boosting growth, while helping achieve Korea’s target of a 37% reduction in emissions from a business-as-usual baseline.