Boston, MA -- (SBWIRE) -- 03/14/2013 -- Core Views

Despite widespread calls for a bottoming out in South Korea's economy, we believe the worst is yet to come. Forward-looking macro indicators suggest to us that economic weakness is likely to persist well into 2013. We expect real GDP growth to come in at 3.0% in 2013, which remains below consensus' expectations of 3.4%.

We expect the Bank of Korea to stand pat with regards to interest through 2012 and 2013. While we expect food price inflation to remain elevated through 2013, we are unlikely to witness food price surges, a la 2008 and 2011. With inflationary pressures likely to continue, coupled with a near-term economic rebound, policy easing is unlikely to be on the cards in the immediate future.

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The domestic property market is likely to remain weak through much of 2012 amid the bleak economic landscape. A supply overhang and the country's perennial household debt situation are also likely to keep downward pressure on prices.

The welfare pledges of South Korea's presidential candidates are likely to prove a costly election carrot and may lead to concerns towards the country's long-term fiscal well-being. We highlight that, of the two parties, the Saenuri Party's policies are more pragmatic and more affordable. The DUP's Moon Jae-in's proposed fiscal reforms and consistent push for restructuring of the corporate sector are likely to be detrimental to the country's business environment.

Forecast Changes

We expect the economic weakness to extend into 2013 and have seen fit to downgrade our growth expectations to 3.0% from a previous estimate of 4.5%. The revision sees downward adjustments across all growth components, with the largest changes seen in private consumption and net exports. We continue to see the latter as the main drag on growth in 2013.

Key Risks To Outlook

Downside Risks To Economic Growth Forecast: Should we see a sharper-than-expected downturn in the global economy or even an implosion in South Korea's household debt market, we would certainly expect to see a substantial weakening in its exports sector, which, in turn, may push the economy into a pronounced recession.

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