South Korea to suffer as infrastructure budget gets slashed

However, 2018 GDP is still projected to be positive at around 2.9%.

As the government moves to slash the budget for public infrastructure to a fifth of last year’s allocation, South Korea faces an impending economic deceleration in 2018, according to Asia Economic Outlook & Strategy from Citi Research.

The South Korean government cut spending on Social Overhead Capital by 20% YoY from 2017 budget in its 2018 budget proposal.

Moreover, Citi forecasts that a contraction in construction investment, moderation in residential building investment and flat growth from investments in non-IT sector facilities will also drag down growth.

Nonetheless, GDP is still expected to remain positive at 2.9% thanks to strong performance from semiconductor-driven exports which accounted for 40% in the total increase in custom exports in the first ten months of 2017.

Similarly, easing tension from the deployment of the US Army’s Terminal High-Altitude Area Defence (THAAD) will generate activity in tourism and retail industries and drive growth to consumer goods exports.

Here’s more from Citi:

Inflationary pressure from imported price of commodities (mostly oil) may be relatively weaker than those in 2017 along with further appreciation of KRW. We see more upside risk on inflation from demand side due to positive GDP output gap and govt’s efforts to raise overall wage. 

In particular, the likelihood of higher and steady wage inflation may rise to some extent with the followings: 1) sharp hike of minimum wage, 2) govt’s promotion for hiring of regular workers and 3) ordinary wage recalculation issue. 

However, two factors may curb demand-side pressures. First, wage inflation could end up inducing substitution towards capital vs. labor or migration of production elsewhere. Second, it is also unclear how the actual wage negotiations in 2018 will impact overall domestic service inflation with elevated unemployment rates.