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The rebound in international trade and greater fiscal support are projected to sustain output growth at around 3% through 2019, even though construction investment is projected to slow following tighter regulations on housing and mortgage lending. High household debt and weak employment growth continue to hold back private consumption. Inflation is projected to remain close to 2%, while the current account surplus will edge up to 6% of GDP.
The government's strategy of “income-led growth”, driven by public employment, a sharp rise in the minimum wage and increased social spending, needs to be supported by reforms to raise productivity. Fiscal policy, which is increasingly focused on income redistribution, also needs to place greater emphasis on productivity. Gradually reducing the degree of monetary accommodation by raising the policy interest rate from a record-low 1¼ per cent would help keep inflation in check and contain household debt.
Household debt is high, at nearly 160% of household disposable income, and rising. The strengthening of macro-prudential regulations and housing taxes and regulations have slowed mortgage lending, but risk creating a downturn in residential construction. Measures to put household debt on a downward trend are a priority to promote inclusive growth, in part by addressing the high debt burdens of older persons, the self-employed and low-income workers.
Economic Survey of Korea (survey page)