South Korea: Weak construction investment is driving slowdown – Standard Chartered

According to Chong Hoon Park, Head of Korea Economic Research at Standard Chartered Bank, external headwinds are widely blamed for Korea’s current economic challenges – the global slowdown, the escalating US-China trade war, the semiconductor down-cycle, equity outflows and a weakening Korean won (KRW).

Key Quotes

“2019 growth forecasts have recently been downgraded (including ours, to 2.3% from 2.5%), and macroeconomic indices have been on a clear downtrend for over half a year. However, we think tepid construction investment, rather than external factors, is the biggest reason for slowing growth.”

“We also believe that government policies – including budget cuts for SOC spending on roads, railroads and ports, and tighter housing-market regulations – are to blame for recent sluggish construction investment.”

“The government cut fiscal spending on SOC by 2.3% in the 2019 budget. It also adopted new housing-market regulations in September 2018, including tightening the debt service ratio (DSR) and increasing the real-estate tax. Since government regulations on the housing market are likely to be strengthened further in the coming months as expectations of Bank of Korea rate cuts increase, we think tepid construction investment will continue to adversely affect the job market and the economy.”

“This year’s supplementary budget may provide relief on the fiscal front, however. The Moon administration implemented a supplementary budget of KRW 6.7tn in April and allocated KRW 246.3bn of this to SOC. If this spending can be effectively executed, it could help to revive construction investment.”