Output growth is projected to slow to around 3% in 2015, reflecting sluggish private consumption in the context of high household debt and stagnant wages. Inflation has fallen to less than 1%, well below the target range of 2.5% to 3.5%, while weak domestic demand is boosting the current account surplus to around 7% of GDP. Lower oil prices are projected to support stronger consumption and investment, boosting output growth to 3½ per cent in 2016.
With output projected to remain below potential for the fourth straight year, fiscal stimulus is needed to support economic activity and complement monetary policy easing, which has reduced the policy interest rate to a record low. Korea also needs wide-ranging structural reforms, including those in the 2014 Three-year Plan for Economic Innovation, to support its growth potential.
A top priority is to raise investment to reverse the declining contribution of capital growth to productivity and GDP growth. Implementation of the government reform agenda, which focusses on relaxing regulations and promoting the development of a creative economy, is key to supporting business investment and boosting inclusive growth.