Asia Pacic

Economic
Outlook
June 2014
Australia
China
Japan
South Korea
Australia: Steady outlook as mining boom tapers off | 2
China: The worlds largest economy? | 5
Japan: Its wait and watch for policymakers | 8
South Korea: The economic rally continues | 11
Additional resources | 14
About the authors | 15
Contact information | 15
Contents
1
A
USTRALIAS economic growth picked
up pace in Q4 2013 and grew 2.8 percent
year over year afer averaging 2.3 percent in the
frst three quarters of 2013. Te economy grew
at its fastest pace since Q4 2012, primarily due
to net exports. Depreciation of the Australian
dollar helped boost exports and restrain
imports in 2013.
According to the latest data releases, trade
balances continued to improve in the frst
three months of 2014. However, a fall in min-
ing exports caused Australias trade surplus to
narrow in March and resulted in a downward
revision of export estimates for February. Yet
the trend continued to remain strong in the
frst three months of 2014, indicating a solid
contribution from net exports to economic
growth in Q1 2014 as well. More importantly,
the latest export data indicate that the transi-
tion from mining investment to production is
gathering momentum despite moderation in
Chinese economic growth.
Consumer spending, too, has contributed
to growth; there has been a steady increase in
household spending over the past six months,
and retail sales have been rising since August
2013. Te latest monthly indicators suggest
that the momentum of strong consump-
tion demand has continued in the frst few
months of 2014 as well. Household spending
was 5.5 percent year over year in the frst two
months of 2014, up from 4.7 percent in Q4
2013. Te AFGC CHEP Retail Index was also
5.8 percent higher in March 2014 compared
with the same month last year, and this is its
highest level in more than four years.
1
Te
improvement in retail sales was broad based;
sales increased consistently across all sectors
since mid-2013 as retailers benefted from an
extended period of low interest rates and a rise
in housing prices.
Australia
Steady outlook as mining
boom tapers off
By Dr. Rumki Majumdar
2 | Asia Pacic Economic Outlook
Limited downside risks
Downside economic risks are low com-
pared with those of many advanced industrial
nations due to steady economic growth, a low
infation rate, and a relatively healthy fs-
cal account. However, there are a few chal-
lenges that the economy faces. One of the
biggest challenges is a structural decline in
the Australian mining industry as the min-
ing boom shows signs of tapering of. Slowing
demand from China (which is Australias
biggest trading partner), falling commod-
ity prices, and higher cost of production are
resulting in heavy losses to
the industry. Many projects
are becoming unviable. Te
industry has already suspended
a few mining operations and is
set to close many mines. While
mining will continue to remain
the most vibrant sector of the
economy, overall activity in this
sector will likely be impacted by
lower investment.
Labor market conditions are relatively sof;
total employment grew 0.7 percent year over
year in Q4 2013, the slowest growth since
2010. Te latest labor market data show that
the unemployment rate touched 6 percent
in Q1 2014, which is the highest level since
2003. With growth in the mining industry
likely to stagnate and even possibly decline in
the coming years, employment growth in this
labor-intensive sector is expected to fall. On
the other hand, growth in the non-mining sec-
tor is showing signs of improvement. However,
sustainability of growth will remain a cause for
concern in the near future. Overall employ-
ment in Australia will likely increase, but at a
gradual pace.
Household spending has remained
robust so far due to low borrowing costs and
improved household wealth, supported by an
increase in house prices. However, low lend-
ing rates have resulted in a sharp rise in risky
home loans. Australias household debt has
been steadily rising and recently hit a record
high of 177 percent of annual disposable
income. If adjusted for infation, household
liability to banks and other lenders is at its
highest level since 1988 and is highly unsus-
tainable. Tese highly leveraged households
are extremely vulnerable to a rise in interest
rates and fnancial or housing shocks. In other
words, while household spending has sup-
ported growth in recent times and is expected
to be a big contributor in the future as well, its
sustainability is vulnerable to fnancial risks
of households.
Policies that might impact
downside risks
Te new Liberal-National coalition govern-
ment has committed to steering the budget
slowly back to surplus. Tis implies that gov-
ernment expenditure may not contribute much
to growth in the coming years. Te govern-
ment also has decided not to provide fnancial
assistance to frms in struggling sectors. Te
rationale behind this decision is to channelize
resources into sectors where the country has
a comparative advantage, which in turn could
boost economic productivity.
Such policies will help the mining sector,
while loss-making manufacturing industries
such as automobiles and airlines will eventually
close down their production in Australia. For
instance, a few major foreign-based automobile
companies have recently announced the end
Te government also has decided
not to provide fnancial assistance to
frms in struggling sectors.
June 2014 | 3
of local production in Australia. Recently, the
government introduced the sale amendment
bills of the national airline Qantas to remove
limits on foreign ownership and eliminate
stipulations that require much of the airline
facilities and staf to be based in Australia.
Tese policies will have signifcant impli-
cations on the labor market as well as on the
growth potential of the economy. Presently,
mining is a critical sector and will be one
of the biggest contributors to Australias
economic growth for the coming decades.
However, channelizing economic resources to
a sector that has reached its peak and whose
growth may gradually come down in the next
few years may not be appropriate. Again,
the rise in the unemployment rate and fall
in total employment due to fewer manufac-
turing opportunities may worsen the labor
market situation.
Te Reserve Bank of Australia (RBA) lef
the ofcial cash rate unchanged at a historically
low rate of 2.50 percent in its recent monetary
policy meeting. Tis fagged the end of the
rate-cutting cycle that saw the cash rate fall
from 4.75 percent in November 2010 to the
current rate of 2.50 percent. While low rates
have helped improve household consumption
and house prices, they have also aggravated the
household debt situation, as pointed out ear-
lier. Moreover, low rates have failed to improve
business investment in the economy, which has
been steadily falling since mid-2012. While the
consumer price infation rate of 2.9 percent is
just within the RBAs target range, low rates,
a weak domestic currency, and a moderate
growth outlook may soon result in prices ris-
ing beyond the RBAs comfort zone. Terefore,
any further rate cut may not be rational, and
the decision to leave the ofcial interest rate
unchanged is a welcome relief for households.
At the same time, an immediate tightening of
monetary policy may not be prudent because
it may throw a wrench in the economic growth
momentum. In short, the pace and the tim-
ing of the interest rate hike will be critical for
the economy.
Growth outlook
Te International Monetary Fund (IMF)
expects Australias economy to grow at a
gradual pace and has reduced its growth
forecast to 2.6 percent in 2014 and 2.7 percent
in 2015. It had previously expected growth to
be 2.8 percent and 2.9 percent, respectively.
According to the IMF, Australias economy is
likely to grow below trend as the investment
phase of the mining boom reaches its peak
and begins to decline.
2
On the other hand,
the RBAs views are slightly more optimistic.
According to the bank, growth is expected to
pick up in 2014 owing to a weaker currency
and stronger activity in the housing and retail
sectors.
3
Te economy will grow in the range
of 2.253.25 percent this year, up from the
23 percent range forecasted in its last state-
ment on monetary policy in November 2013.
Growth will likely gather pace over the next
couple of years.
Endnotes
1. Analysis is conducted by Deloitte Analytics, and the commentary is from Australian Food and Grocery Council
(AFGC), which represents Australias $108 billion food and grocery manufacturing sector. Te AFGC CHEP Retail
Index ofers new insight into the performance of Australias retail market. For more information, visit http://www.
deloitte.com/au/chep-index.
2. International Monetary Fund, World economic outlook: Recovery strengthens, remains uneven, April 2014, http://www.
imf.org/external/Pubs/f/weo/2014/01/.
3. Reserve Bank of Australia, Statement by Glenn Stevens, governor: Monetary policy decision, May 6, 2014, http://www.
rba.gov.au/media-releases/2014/mr-14-07.html.
4 | Asia Pacic Economic Outlook
China
The worlds largest economy?
By Dr. Ira Kalish
T
HE Chinese economy grew 7.4 percent in
the frst quarter of 2014 versus a year ear-
lier, and was up 1.4 percent from the previous
quarter. Tis slower growth was a continuation
of the slowdown that has aficted China dur-
ing the past year, although growth remained
in a range that the government has targeted.
Te big question is whether China can simul-
taneously sustain growth while reducing its
dependence on credit expansion.
What about the outlook for the coming
months? One can partly infer the direction by
looking at the purchasing managers indices
(PMIs). Evidently, Chinas manufacturing sec-
tor continues to decline, at least according to
the latest PMI for manufacturing from Markit.
1
Te index moved from 48.0 in March to 48.1
in April. A reading below 50.0 means declin-
ing activity, so the indexs increase means that
activity continued to decline, but at a slightly
slower pace. Tis was the fourth consecutive
month of decline. Separately, a Chinese gov-
ernment PMI for manufacturing indicates
very modest manufacturing growth in April.
Te index was 50.4, up from 50.3 in March.
Te government index, separate from the
better-known one issued by Markit, is heavily
weighted toward state-owned companies. Tis
report still suggests considerable weakness in
the manufacturing sector. Te subindex for
export orders was especially weak at 49.1, indi-
cating a decline in such orders. Some investors
are hoping for more stimulatory measures by
the Chinese central bank, such as a cut in the
reserve ratio for banks. Yet boosting credit
market activity is also risky because there may
already be too much bad debt in the system
and there is certainly excess capacity in indus-
try. A more sustainable way to fx the economy
would be to stimulate consumer spending
rather than debt-fueled fxed asset investment.
June 2014 | 5
It appears that, despite government eforts
to the contrary, credit in the non-bank shadow
banking system continues to rise rapidly. Te
government reports that, in the frst quarter,
trust company assets were up 8 percent from a
year earlier. Te countrys trust companies now
have assets of 11.7 trillion Chinese yuan, or
$1.9 trilliona record high. Te average return
on trust assets has declined.
Recall that trust companies have been
established to circumvent restrictions on
formal banking. Te trusts lend money
to private enterprises (including property
investors). Tey raise money by selling trust
products to private investors, usually ofering
a return far higher than is available through
formal banks. Te trusts are ofen informally
backed by banks.
Te problem is that
trusts have loaned
money for many
projects that are not
expected to gener-
ate positive returns.
Increasingly, trusts
could face trouble
meeting their
obligations and may
require help from
banks. Banks, in turn, could fnd themselves
in trouble. Tus further growth of this shadow
banking activity is worrisome. Although it
contributes to economic growth in the short
term, it creates more stress on the fnancial sys-
tem in the longer run. It is thus not a sustain-
able model for future economic growth.
Is China No. 1?
For some time, weve known that Chinas
economy would eventually overtake that of
the United States. Most estimates had pointed
to the later years of this decade. Yet now the
World Bank estimates that Chinas GDP will
overtake that of the United States this year.
2

Two questions emerge: First, how is this deter-
mined? Second, does it even matter?
First, for the purposes of this exercise,
the World Bank does not measure the size of
Chinas GDP at current exchange rates. If this
were to be done, the US economy would still
be far larger than that of China. Rather, the
World Bank uses a purchasing power parity
(PPP) exchange rate. Tat is, it converts Chinas
local-currency GDP to US dollars using an
exchange rate that refects the true purchasing
power of the currency. How is this done? Te
World Bank takes a large basket of goods and
services for the United States and determines
the dollar price of this basket. Ten it takes
a similar basket in China and determines its
renminbi price. Te ratio of the renminbi price
to the dollar price of this basket determines the
PPP exchange rate. For example, if the US bas-
ket costs $100 and
the Chinese basket
costs 350 yuan, then
the exchange rate is
350/100, or 3.5 yuan
to the dollarwhich
is, in fact, roughly
the World Banks
estimate of the
PPP exchange rate.
Keep in mind that
the current market
exchange rate is roughly 6.2 yuan per dollar.
Te World Banks new fgures on GDP are
based on new estimates of the composition and
price of that basket.
Second, does this matter? Not really. Clearly
China has many residents, and its economy
has grown very rapidly in recent years. Te
fact that it is now the worlds largest economy
simply means that it generates enough goods
and services to match the purchasing power
of the United States. Yet China has four times
as many people as the United States, so its per
capita output is thus one-quarter that of the
United States. In other words, it has a long way
to go to match the living standards of afuent
countries. Moreover, for a variety of reasons,
Chinas growth is likely to slow down in the
future. Also, keep in mind that, at current
In China the unequal
distribution of income
now exceeds that of the
United States.
6 | Asia Pacic Economic Outlook
Endnotes
1. Markit, HSBC China Manufacturing PMI, May 5, 2014, http://www.markiteconomics.com/Survey/PressRelease.mvc/94
31bf0b83c04209820fd77c2b2f856.
2. Chris Giles, China poised to pass US as worlds leading economic power this year, Financial Times, April 30, 2014,
http://www.f.com/intl/cms/s/0/d79ff8-cf7-11e3-9b2b-00144feabdc0.html?siteedition=uk#axzz316UAPiv8.
3. Lorraine Woellert and Sharon Chen, Chinas income inequality surpasses U.S., posing risk for Xi, Bloomberg, April 29,
2014, http://www.bloomberg.com/news/2014-04-28/gap-between-rich-poor-worse-in-china-than-in-u-s-study-shows.
html.
4. Ibid.
exchange rates, the US economy is still far
larger than that of China. In terms of Chinas
participation in the global economy, such as
purchasing commodities and high-technology
equipment from other countries, Chinas pur-
chasing power still lags considerably. Te mea-
sure of GDP using a PPP exchange rate largely
refects the low prices of domestic services
in China. For example, the prices of haircuts,
restaurant meals, and health services are very
low in China, thus efectively increasing the
true purchasing power of a Chinese wage. Tis
is one of the principal reasons for China being
the worlds largest economy. From that per-
spective, the label is not very meaningful.
How bad is Chinas
income disparity?
In China the unequal distribution of
income now exceeds that of the United States.
Tis is according to a new study conducted
by the University of Michigan in conjunction
with several Chinese universities.
3
In addition,
income inequality ranked No. 1 among prob-
lems cited in a survey of Chinese consumers,
ahead of corruption and unemployment.
4
Tus
it is no surprise that the government is keen to
address this issue that threatens social stability.
Indeed the governments recent crackdown on
corruption is part of a larger efort to address
income inequality. Recent protests and strikes
are a manifestation of the resentment that is
brewing in China. Te most common measure
of income inequality used by economists is
known as the Gini Coefcient. Tis measure
is 0 when income is evenly distributed and
1.0 when it is completely concentrated in one
person. In 1980 Chinas Gini Coefcient was
0.30; by 2000 it was 0.41; today it is 0.55. In the
United States, by comparison, it is 0.45. Te
rise in Chinas Gini Coefcient was unusually
rapid in the past decade.
June 2014 | 7
E
CONOMIC activity picked up in the last
month of Q1 2014, supported by a last-
minute rise in consumer spending in anticipa-
tion of the rise in consumption tax in April.
Japanese household spending in March jumped
10.7 percent month over month, the highest
growth since 1975, even though real dispos-
able income of working households dropped
3.2 percent year over year. Consequently, retail
sales increased at their fastest pace in 17 years.
Growth in retail sales jumped to 11 percent
month over month in March from 3.6 percent
in February, while total commercial sales saw
an increase of 8.6 percent. Industrial produc-
tion in March grew 0.3 percent from the previ-
ous monthan increase afer a sharp decrease
of 2.3 percent in February. Te pickup in activ-
ity in March points to a possibility of stronger
GDP growth in Q1 2014.
However, Marchs increased activity is very
similar to what Japan experienced 17 years
back, right before the sales tax was increased.
What followed was a plunge in consumer
spending that drove the economy into a reces-
sion. Is history about to repeat itself? Tere
is no doubt that the pickup is unsustainable
and spending is expected to fall in the coming
months following the tax increase. Some for-
ward-looking indicators are already indicating
deterioration; latest sales data on automobiles
have given the frst indication of this decline.
What is to be seen is whether the economy
has the capability to pull itself together and
rebound in the coming quarters.
A decline as expected
Consumers rushed to buy goods before the
sales tax rise, setting the stage for a decline in
consumer spending in the following months.
Japan
Its wait and watch for policymakers
By Dr. Rumki Majumdar
8 | Asia Pacic Economic Outlook
Tis is evident from the consumer confdence
index, which has slumped in recent months
and is at its lowest since December 2011.
Confdence fell 1 percent month over month
to 37.5 in March 2014, primarily due to a
sharp decline in consumers willingness to
buy durable goods. According to the Bank of
Japans (BOJs) Tankan survey in March 2014,
domestic demand is expected to fall post the
sales tax hike that came into efect in April.
1

In March car sales reached their high-
est monthly level in eight years. Latest data
suggest that automotive sales fell 5.5 percent
from March to April. However, the fall in sales
was sofened as many cars ordered in March
were actually delivered in April. Te industry
expects a much bigger decline in May and
subsequent months.
It is probably too early to draw a frm con-
clusion on the possible impact of the sales tax
on domestic demand. As of the date of writing
this article, more data were yet to be released
for April. Te downside risks are high, and
data for April may not even refect the com-
plete impact. Not all consumers might have felt
the impact of tax increases yet, and some may
take time to adjust their consumption patterns.
Terefore, it is highly probable that the data
for the subsequent months may worsen. But,
at the same time, labor market improvements
and a widespread rise in wages since 2008 may
partially cushion the impact of the tax rise in
the coming months. Additionally, a price rise
will likely result in more business investment,
already evident from the recent strengthening
of core machinery orders. In other words, mar-
ket speculations will be high now, and data in
the coming months will give a clearer picture
about the downside risks resulting from the
impact of taxes on demand.
It is not just domestic demand that is a con-
cern for Japan. Te other cause of worry is the
steady fall in exports, on which many Japanese
companies rely and which are the key driver of
Japans economic growth. Sluggish economies
overseas have limited Japans export growth.
In addition, the banking crisis in China has
resulted in greater uncertainty in the demand
for exports from Japans second-largest
export destination.
Te good news is that infationary pres-
sures have re-emerged in Japan; the seasonally
adjusted consumer price indices increased 1.6
percent year over year in March. Factors such
as easy monetary policies, the tax rise, and a
depreciated currency will likely continue to
put an upward pressure
on prices. According to
a consumer confdence
survey by the Cabinet
Ofce, around 77 percent
of respondents expect
prices to rise more than 2
percent in the next year.
2

A year back, only 43.5
percent of survey respondents expected prices
to go beyond 2 percent.
BOJs balanced outlook
In its latest semiannual report, the BOJ has
cut its target for real GDP growth to 1.1 per-
cent for FY 2015 (ending March 2015), down
from its January projection of 1.4 percent. Te
BOJ cited structural weaknesses such as fscal
and external balances as factors that will likely
weigh on growth. In addition, it expects the
impact of the consumption tax rise on demand
to be signifcant in the immediate quarters. Te
bank, however, has kept its real GDP forecast
for FY 2016 unchanged at 1.5 percent.
3

According to the governor of the BOJ, the
overall outlook of the economy is balanced. He
expects the negative impact of the tax hike to
be temporary.
4
Private consumption will likely
Sluggish economies overseas have
limited Japans export growth.
June 2014 | 9
remain resilient, underpinned by an improve-
ment in employment and incomes in the sec-
ond half of 2014. Exports are likely to increase,
albeit moderately, supported by a depreci-
ated Japanese yen and stronger growth in the
United States. Terefore, the economy is likely
to grow at a pace above its potential growth.
Te BOJ is also confdent that Japan will
achieve its 2 percent infation target within two
years. Te bank will continue with quantitative
easing for as long as necessary to achieve the
infation target and growth stability. However,
there might not be any immediate action by
the bank in response to the tax hike. Te bank
will examine both upside and downside risks
to economic activity and prices before taking
appropriate policy measures.
Endnotes
1. Bank of Japan, Tankan: Te comprehensive data set of the March 2013 survey, March 2014, http://www.boj.or.jp/en/
statistics/tk/zenyo/2011/all1303.htm/.
2. Cabinet Ofce, Price expectations a year ahead, Consumer confdence survey, April 2014, http://www.esri.cao.go.jp/en/
stat/shouhi/shouhi-e.html#price.
3. Bank of Japan, Outlook for economic activity and prices, April 2014, http://www.boj.or.jp/en/mopo/outlook/gor1404b.
pdf.
4. Ibid.
10 | Asia Pacic Economic Outlook
S
OUTH Korea has been in mourning since
a ferry disaster lef scores of children dead.
Te tragedy claimed its frst political victim
recently, when the prime minister resigned
in response to popular discontent regarding
post-disaster handling. Unless a new cabinet is
formed quickly, key economic reforms might
be hit. Tat would be unfortunate as reforms
would certainly add strength and sustainability
to the current momentum in economic activ-
ity. Any delay would also leave the economy
vulnerable to key risks such as high household
debt, low income mobility, an aging popula-
tion, and the concentration of economic power
in large industrial houses.
Growth speeds up in Q1 2014
Te economy expanded 0.9 percent quarter
over quarter in Q1 2014, continuing its strong
momentum from Q4 2013. Investment was one
of the main contributors to growth last quarter;
gross fxed capital formation expanded 3.5
percent, the fastest pace in a year. Exports were
the other success story in Q1, expanding 1.7
percent. Given that exports amount to about
half of GDP, an uptick in the segment over the
last two quarters will be encouraging for South
Koreas policymakers.
On the negative side, private consumption
growth slowed for the third straight quarter to
0.3 percent, as high household debt ofset the
benefts of low infation. Also, a deeper look
at the data reveals that investment in facili-
tiesan indicator of private sector investment
in plants and machinerydropped 1.3 percent
in Q1 2014. Tis is another sign that businesses
are still uncertain about demand growthboth
domestic and external.
South Korea
The economic rally continues
By Akrur Barua
June 2014 | 11
Exports on their way up
Te strong momentum in exports in Q1
2014 has continued into this quarter. In April
exports expanded 9.1 percent year over year,
the fastest pace in about 15 months. External
demand has been going up, aided by a recov-
ery in the United States and, to a lesser extent,
Europe. Rising demand from the West has
helped South Korean businesses overcome
slowing demand growth from China, the
countrys largest export market. For example,
in April shipments to the United States grew
19.3 percent, up from 16.9 percent in March;
in contrast, exports growth to China fell to 2.4
percent from 4.4 percent during this period.
However, the shif in Chinas growth momen-
tum might not be bad
news for key manufac-
turing goods exporters
such as South Korea
in the medium term,
especially if the worlds
second-largest economy
shifs to a more domes-
tic consumption- driven
growth model.
Strong won amid emerging
market volatility
Interestingly, the current recovery of
exports is despite the South Korean wons
strength. In April 2014 the won touched a
six-year high against the US dollar. Tis was
afer a rise of almost 1 percent in 2013, a stark
contrast to sharp losses in major emerging-
market currencies. In fact, amid all the anxiety
over US Federal Reserve tapering last year, the
won emerged as a safe currency, given South
Koreas healthy growth prospects, strong exter-
nal balances, and stable public fnances.
Despite the wons strength, the International
Monetary Fund (IMF) believes that the cur-
rency is relatively undervalued, given South
Koreas strong external surpluses. Te current
account surplus was 6.1 percent of GDP in
2013, and the trade balance has been in the
black since April 2012. Te IMF estimates that
the won is undervalued by 28 percent, with a
bias toward the upper end.
1
Low ination aiding
monetary policy
For the central bank, infation is not a
worry, despite rising to an eight-month high
of 1.5 percent in April. Tis fgure is way
below the Bank of Koreas (BOKs) target of
2.53.5 percent. A low base and rising prices
of key imports (including oil) are likely to
push infation up this year. However, this will
be partially ofset by a stronger won, keeping
infation below the BOKs target; the central
bank expects average
annual infation to be
2.1 percent in 2014. Low
infation also makes
it easier for the BOK
to develop a gradual
approach to any future
monetary tightening.
For now, with the econ-
omy gaining strength,
the BOK appears happy to keep rates on hold;
it did so for the 11th straight month in April.
Te central bank is not likely to embark on a
rate-tightening spree before Q4 2014, with a
starting hike of not more than 25 basis points.
High household debt is a worry
High household debtestimated to be 160
percent of disposable income and 77 percent of
GDP in 2013is perhaps the biggest short- to
medium-term risk facing policymakers. High
indebtedness has been weighing on private
consumption growth while creating complica-
tions for monetary policy. With close to 80
percent of household debt set to foating rates,
any rate hike will likely push up debt-servicing
costs and thereby raise risks for commercial
banks as well.
Consumers seem
upbeat despite their
high debt burden.
12 | Asia Pacic Economic Outlook
To their credit, policymakers are trying to
address the problem. Tey have already set a
target of pushing up the share of fxed-rate,
amortizing mortgages to 40 percent of total
mortgages by 2017. Te government has also
brought in legislation allowing local banks
to issue covered bonds, a source of low-cost,
long-term funding. Tis in turn will enable
banks to ofer longer-term mortgage loans at
fxed rates, thereby protecting borrowers from
changing interest rates.
And even though
condence is rising . . .
Consumers seem upbeat despite their high
debt burden. For example, consumer senti-
ment, as measured by the BOK, came in at
108 in April, unchanged from the previous
month; a reading above 100 indicates a larger
share of optimists in the survey. Optimism is
also rising among businesses, albeit slowly,
amid improving industry data. In March both
industrial production and manufacturing
grew 0.9 percent month over month, the frst
expansion this year. No wonder then that busi-
ness confdence went up for the third straight
month in April. Businesses will beneft more in
the coming quarters as export orders go up due
to strengthening demand in the West. Tis, in
turn, is likely to aid investment in the second
half of 2014 and push growth in the segment
up to 3.54.0 percent over 201516.
. . . There is need for
strong reforms
South Koreas economic outlook is more
positive than a year ago. In April the BOK
upgraded its GDP growth forecast for 2014
to 4.0 percent, up from an earlier estimate of
3.8 percent and above the 2.8 percent growth
last year. Policymakers should leverage this
momentum to push key reforms, especially in
labor markets as well as the small and medium
enterprise (SME) sector. A starting step could
be to aid SMEs to enhance productivity.
Making compensation in the regular workforce
more merit based is another step; so is reduc-
ing the size of the irregular workforce. A fourth
move could be to encourage greater female
participation in the labor force; this will also
help ofset the impact of an aging population.
Te country also needs to spruce up social
spending, which is about 6 percent of GDP,
below levels specifed by the Organization for
Economic Cooperation and Development.
2

While the government has made a start in all
the above steps, it is critical that its momen-
tum doesnt slow, given South Koreas fve-year
term limit for a president. Any delay will only
create peril for the economy in the medium to
long term.
Endnotes
1. Reuters, Korean won undervalued by as much as 8% - IMF, CNBC, April 2014.
2. International Monetary Fund, Republic of Korea: 2013 Article IV consultation, April 2014.
June 2014 | 13
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June 2014 | 17
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