North Korea’s tension unlikely to derail South Korea’s recovery - Natixis

Alicia Garcia Herrero, Chief Economist a Natixis points out that the heating up of North Korea (NK)’s difficult relations with the US and the risk of a military conflict shook South Korea financial markets’ confidence last week.

Key Quotes

“We explore how the North Korean Crisis (NKC) may impact South Korea’s economy under the most likely scenario, which in our view is that of a muddle-through, in which South Korea continues to be on high alert due to North Korea’s related tensions.”

“In such scenario, South Korea’s economy is unlikely to be materially impacted by North Korea’s related tensions as it is basically an escalation and not a change in the status quo. We argue that because investors also share our assessment of the NKC, investment - the most important transmission channel because of its dependence on the degree of uncertainty - has been on the rise for months, and we expect that trend to continue.”

“Under such circumstances, we doubt that South Korea’s GDP growth can fall short of 2.9% in 2017 even at the currently heightened level of tensions with North Korea. We even expect a slight improvement in GDP growth in 2018 (3.0%). Beyond 2018, the South Korea economy’s potential growth will deteriorate to 2.5% – and not because of geopolitics but on drastically worsening demographics.”