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With strong real wage growth and high employment levels, the GDP growth is expected to remain firm, though declining to 4.0 per cent in 2003 before rising somewhat to 5.3 per cent in 2004. The slowdown in consumer spending growth arising from tighter consumer credit and mortgage terms will be largely offset by rising exports to growing world markets, the end of the global manufacturing downturn, and a moderate revival of savings and business investment. There is, however, a downside risk stemming from rising uncertainty over developments in the north of the peninsula and the aftermath of the conflict in Iraq.
A series of government stimulus packages and improving external conditions are likely to breathe a bit of life into South Korea’s economy. After two consecutive quarters of contractions, the economy is showing signs of a mild recovery. The economic outlook for the rest of the year is not so bright but likely to see a U-shaped recovery, spurred by robust exports. In the first six months of this year, the economy is believed to have expanded by 2.8 per cent. The central bank, the Bank of Korea, expects that economic growth will gather pace in the second half of the year, with a full-year growth rate of 3.1 per cent. That’s still less than original expectations. The Ministry of Finance and Economy cut its GDP growth forecast for the year to 3.5 per cent from an earlier prediction of 5 per cent.
Planned capital investment by the 200 largest corporations is forecast to increase in the second half of 2003, according to the Ministry of Commerce, Industry and Energy, when global markets are expected to pick up and corporate debt-equity levels will have declined to even more comfortable levels. Automobile, machinery, and petroleum companies are expected to be the most aggressive in their investment spending. The slowdown in consumer spending is likely to cause unemployment to edge up marginally.
Exports are expected to rise by 8.0 per cent and imports by 9 per cent in both 2003 and 2004. The change in trade patterns favouring higher exports to the PRC and Hong Kong, China should help export performance weather any slowdown in the US or the EU. Nevertheless, the current account is expected to slip back into the red as the services account deficit and recovery-driven imports increase. Slowing domestic consumption is expected to feed into growth of only 1.7 per cent for the industry sector. Government efforts to expand the housing supply and spending on social infrastructure projects will continue to support construction investment, while support for the SME is aimed to counter the consumption slowdown.
The government has lowered interest rates, drawn up a supplementary budget worth 4.2 trillion won ($3.6 billion) and cut taxes on big-ticket consumer goods. Investment in the manufacturing sector is also likely to improve thanks to a gradual recovery in the global information-technology industry. Industrial output climbed 7.8 per cent in June from a year earlier, but during the Korea-Japan World Cup soccer championship in 2002 many companies had cut work house to let employees watch the games. Analysts are pessimistic that the economy will go into full-recovery mode any time soon. Private consumption, which had buoyed the economy in the past, is unlikely to bounce back in earnest because of staggering household debt. Outstanding household debt in March stood at 440 trillion won — equivalent to around 74 per cent last year’s GDP.
Despite the efforts by economic-policy makers to boost business sentiment, many companies have delayed investment that they had planned earlier this year. They blame the government for its lack of policy direction in dealing with corporate reform and labour disputes. The seasonally adjusted Business Survey Index in July stood at 90.9, the lowest level since the Asian financial crisis in 1997-98. Brisk investment in the construction sector, a bright spot for economic recovery, is likely to slow down. The demand for house construction has slowed since the government took steps to stabilize the housing market in May to prevent it from overheating.
The construction industry contributed around one per cent of the last year’s GDP growth. Buoyant construction investment is one of the key reasons why South Korea has performed better than its Asian rivals such as Singapore and Taiwan so far. A significant portion of loans taken by households and small and medium-sized firms in the past few years has gone into construction and real estate.
Thailand has turned in one of the strongest economic growth performances in the region, recording 5.2 per cent inflation-adjusted growth last year, while jumping to 6.7 per cent in the first quarter of 2003, according to preliminary official figures. But because much of that growth has been consumption-driven, confidence is key to sustaining the recovery. The Bank of Thailand estimates Sars fear could shave as much as 0.7 of a percentage point of its 3.5 per cent-4.5 per cent GDP forecast for this year. Merri Lynch, meanwhile puts the worst-case scenario twice as high - at 1.4 percentage points off.
The Thai economy hales enough to overcome the regional side effects of Severe Acute Respiratory Syndrome, or Sars. Thailand’s foreign-currency-spinning tourism industry, which normally represents over 6.2 per cent of the GDP, has been particularly hard-hit by Sars fears. Inbound tourism fell by 43 per cent in April, with average hotel occupancy falling to a record low of 25 per cent. There are indications the rot is now spreading though the broader economy. A May fell conducted by the Thai chamber of Commerce showed that Sars fears are weighing on consumer confidence which waned in both March and April, the first consecutive monthly decline since 2001. Exports, which grew over 21 per cent year on year in the first quarter due to growing trade with china and rising global commodity prices, are also under threat. Nearly 25 per cent of Thai exports are normally destined for Asia’s most severely Sars afflicted economies, including China and Taiwan. The Sars effect “is cascading from tourism down to domestic consumption and exports.
The Thai government is trying to avoid the scenario through new policy initiatives. Earlier the government announced a one billion baht (23.8 million) rescue package for the tourism industry, which includes a new state backed insurance scheme that will pay any tourism $100,000 if he or she contracts Sars while in Thailand. That comes on top of a recent state-let promotional campaign aimed at promoting more domestic tourism. Such schemes probably won’t be enough fill the gap, though. Under pressure from international ratings agencies for greater fiscal prudence the Thai government is scheduled to begin reining in spending in October, reducing the fiscal deficit to 99.9 billion baht, a 43 per cent year-on-year decline.
While growth slowed from the first quarter’s 6.7 per cent, low interest rates supported domestic spending and helped counter Sars’ negative impact on sentiment. The domestic upturn was also supported by strong manufacturing exports, which grew 9.4 per cent in the second quarter, helped by a pick-up in the global economy and the Bank of Thailand’s continuing efforts to prevent a rapid appreciation of the baht. Thai poultry and prawn exports also got a second-quarter boost as rival China was hit far harder by the Sars scare.
The NESDB is forecasting that Thailand’s economy, which grew 6.2 per cent in the first half, will expand by 5.8-6.2 per cent in 2003, up from 5.3 per cent growth in 2002. Stimulus measures adopted by the government including an agricultural price stabilization scheme and projects to provide low-cost homes, computers and insurance to the poor, would help second-half growth.
In contrast to the generally rosy outlook for the rest of southeast Asia, which the International Monetary Fund upgraded in the latest edition of its World Economic Outlook, the IMF’s forecast for the Philippines fell below the government’s own growth targets. Predicting economic growth of 4 per cent for both this year and next, the IMF’s forecast was unchanged from its previous report, citing high public borrowing and a mass of bad debts clogging up the banking system as major constraints. In contrast, Manila forecasts GDP growth of 4.2 per cent-5.2 per cent in 2003 and 4.9 per cent-5.8 per cent in 2004.
The IMF has drawn attention to the precarious state of the Philippines’ balance sheet. While market pressures have abated, strong efforts are needed to achieve the balanced-budget target by 2009 and secure a more rapid disposal of banks’ (non-performing loans).
