Reflecting the impact of the COVID-19 outbreak, the IMF estimates South Korea’s GDP contracted 1.9% in 2020 following a 2% increase in 2019. The economy is now in recovery, benefitting from a pick-up in global demand for Korean electronics and automotive exports. Domestic demand, however, remains weak amid a resurgence in local COVID-19 infections and tighter lockdowns.
The IMF forecasts South Korea’s economy to grow 2.9% in 2021, returning to its pre-pandemic level of output sooner than many other economies. In the near term, the economy’s high competitiveness and diversified export base supports its ability to absorb and adapt to shocks. Fiscal and monetary stimulus measures should support some strengthening in domestic demand. Over time, the global 5G rollout and increasing need for chips related to cloud and cybersecurity boosts will support global demand for semiconductors, and in turn, Korean exports.
Longer term, the South Korean authorities’ proactive planning to identify new growth engines opens possibilities to boost future economic potential. For instance, the so-called “Korean New Deal” aims to increase investment in green and digital sectors (including solar panels and wind turbines, electric vehicles, cloud computing and artificial intelligence) as well as strengthen the employment safety net.
Income inequality is relatively high. This partly reflects a two-tiered labour market (of either high or low-income earners) and differences in productivity between large firms and SMEs, and between industry and services, which generates wage inequality. Income redistribution through taxes and benefits is weaker in the Korean system than in most other OECD countries. Female employment is relatively low and the gender wage gap is the highest in the OECD. Income inequalities are exacerbated by the COVID-19 crisis, which affects disproportionately those with the weakest labour market positions.
The government maintains a focus on tackling significant income inequality. Recent government measures include significant increases in the minimum wage, basic pensions for the elderly and greater unemployment benefits for the youth. As the economy recovers and government measures gain traction, the IMF projects GDP per capita to rise toward US$40,000 in 2025 from an estimated US$30,600 in 2020.