•Rebounding from the financial tsunami, Korea’s GDP gained by 6.1% year-on-year (YoY) in 2010. The IMF estimated that Korea’s GDP will grow by 4.5% in 2011.
•Despite the Bank of Korea (BOK) having raised its administered interest rate twice this year, inflation hit a two-year high in the first quarter of 2010. BOK is under pressure to raise the interest rate again.
•Resulting from the global trade recovery and booming demand from the emerging markets, South Korean exports grew by 29.9% YoY in the first quarter of 2010. Meanwhile, strong domestic consumption helped South Korean imports, which increased by 25.6% over the same period of time.
•FDI from Asia into South Korea increased 86% in 2010. Asia took over Europe as the largest FDI source of South Korea in 2010, accounting for over half of the country’s inward FDI.
Current Economic Situation
Riding on the global economic revival, South Korea’s economy posted a 6.1% growth in 2010, an eight-year record high. After the rapid economic growth in 2010, IMF expected South Korea’s economy will only grow by 4.5% in 2011. Despite the earthquake in Japan leading to concerns of supply chain disruptions, which might affect South Korean manufacturing activities, impact on the overall South Korea’s economy is expected to be limited.
On the other hand, inflation is becoming an important economic issue for the country. The Consumer Price Index (CPI) in South Korea was reported at 4.5% in the first quarter of 2011, hitting a two-year high. The Bank of Korea (BOK) has already raised the interest rate twice to curb inflation this year. Inflation is likely to remain at high levels, due to the supply chain disruptions caused by the March-11 earthquake of Japan and more importantly, strong domestic consumption. BOK will be under mounting pressure to raise its administered interest rate again.
South Korea is one of the Asian economies with high trade dependency, with total foreign trade accounting for almost 90% of the country's 2010 GDP. The performance of Korea’s economy is closely related to its export performance. Exports of South Korea increased by 28.3% YoY to US$466 billion in 2010, surpassing the level before the financial tsunami of 2008-2009. Remarkable growth was primarily a result of the improving global economy and rising demand from the emerging markets. In 2010, exports to Latin America, China and ASEAN increased by 39.4%, 35.2% and 30.9% respectively. Major destinations for South Korean products included the Chinese mainland (25.1% share), the US (10.7%), Japan (6.0%), Hong Kong (5.4%) and Singapore (3.3%). Among all major export items, semiconductors (63.3%), automobile parts (62.6%) and automobiles (39.3%) showed the strongest growth in 2010.
Meanwhile, South Korean imports grew by 31.6% in 2010, which was supported by its strong domestic consumption. Total retail sales in South Korea increased by almost 10% in 2010. Major sources for South Korea included the Chinese mainland (16.8%), Japan (15.1%) and the US (9.5%).
Both imports and exports of South Korea are expected to show strong growth in 2011. In the first quarter of 2011, South Korea’s exports and imports increased by 29.9% and 25.6% respectively. Exports of petroleum products and ships showed a stronger growth while exports of consumer electronics were relatively weak.
To promote inward FDI, the Korean government announced that the cash assistance for overseas companies investing in the country from 15 billion won will be increased by at least twofold, starting from 2011. It is also planned to set up a special district for foreign investment focused exclusively on the service industry in September 2010.
In 2010, total FDI in South Korea increased by 13.8% to US$13.1 billion. Over half of the FDI was from Asia. It increased by 86% YoY. Meanwhile, FDI from the EU dropped by almost 40% to US$3.3 billion.
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