South Korea: Government Unveils Supplementary Budget

Consensus Forecasts

In a bid to support the sluggish economy, South Korea’s government last month unveiled a Won17.3trn (US$15.4bn) supplementary budget. However, a large chunk (Won12.0trn) of the extra budget is being earmarked to cover expected tax revenue shortfalls, and only Won5.3trn is to be used as extra spending. The finance ministry hopes its stimulus package will boost real GDP growth by 0.3% this year and is looking to revitalise the economy through the creation of 40,000 new jobs, providing support for the housing market, as well as low-income households and expanding childcare services. Furthermore, on top of spending geared toward infrastructure projects, trade financing is being extended for small exporters and new businesses will receive funding. The extra budget is set to lift the fiscal deficit from an initially planned figure of 0.3% of GDP this year to 1.8%. It is hoped the supplementary budget will help to inject new life into the stagnant economy. High household debt has weighed on consumer spending, while exporters are losing competitiveness because of the weak Japanese yen.

Judging by preliminary first quarter national accounts data, the economy remained largely lacklustre. Real GDP growth came in at 1.5% (y-o-y), unchanged from the previous quarter. By expenditure breakdown, private consumption showed renewed softness, while fixed investment continued to contract. Externally, weaker growth was noted in both exports and imports of goods and services. However, in q-o-q terms, the headline growth rate did make for better reading as output accelerated to 0.9% in Q1, up from 0.3% in Q4. Still, growth expectations for 2013 have continued to weaken and the central bank recently cut interest rates in a bid to shore up activity.

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