Real GDP is projected to increase by 3.8% and 2.8% in 2021 and 2022, respectively. Strong export growth, rising investment and expansionary macroeconomic policy are boosting the economy. Distancing measures have contained the COVID-19 virus spread, but weigh on large parts of the service sector, which keeps unemployment and the household saving ratio relatively high. When those restrictions can be lifted, the economy will gather momentum.
Policy support should continue to be targeted to vulnerable households and businesses until the economy is on a firmer recovery path, and vaccination should be accelerated. Korean New Deal investments are instrumental in the environmental and digital transitions. Relatively low public debt provides fiscal space, although rapid population ageing creates long-term challenges. Continued accommodative monetary policy is warranted, but prudential policy needs to contain risk-taking and the build-up of household debt.