Bank of Korea’s Forecast for 2016 and 2017 in Perspective
Back when working for the World Bank, I used to say that on many missions, getting the data was 5% of the problem, and believing the data was 95% of the problem.
Aug. 2, 2016
BOK’s July 2016 forecast, which is the last real chance to get an external composite snap shot of BOK’s thinking presents problems, as shown in the following table. BOK has revised its overall 2016 forecast downwards to 2.7% from 2.8%. However when we look at the composition of this change, we find some hard to believe (HTB) data. BOK tells us that the average growth for H1 will be 3% meaning since Q1 was 2.8% (itself a revision from the preliminary 2.7%) that Q2 growth must have been at 3.2%, otherwise we do not get an average of 3%. Alternatively the quarterly GDP data due on July 26th will show a further revision upwards for Q1 towards 3% allowing Q2 to come down from 3.2%.
While on currently available monthly data I can buy the idea that Q2 has been close to Q1, possibly even 0.1% higher – the final figure of 3% is HTB.(I even checked the Korean release to see if there was a transcription error) There is some statistical wriggle room in the export and import performance since in the final GDP equation +(Exports – Imports) is an element.
The only reason not to call BOK out on these figures is that by July 14, BOK just has to know more or less what its Q2 preliminary results will be. Fortunately unlike knowing whether our forecast for 2017-18 is correct where we have to wait two years, we will get the first answer on July 26 at 8 am.
Then what about H2 where growth slows from 3% YoY to 2.4% YoY. We have been dreading that downturn, since BOK first predicted it early in the year, expecting it in Q2 rather than Q3, at the same time wondering can growth at about the present level continue through Q3? Well as the red column shows everything drops dramatically, private expenditures, facilities investment, construction investment. The only thing predicted to get better is a (statistically) massive increase in exports and decrease in imports raising GDP at the +(Exports- Imports) level. Without calculating this in real numbers, mere percentages do not indicate the size of this change.
Whatever its effect, this upturn in exports is also HTB. Even at the beginning of the year it was hard to believe, and by now with BREXIT throwing its weight in, plus extra turmoil in Turkey, China continuing its decline to find its new normal, and even exports to the US declining YoY in June 2016 figures, a sudden upturn is going to come late in Q4 if at all, too late to lift growth.
My colleagues who crunch the numbers of Asia Executive Brief according to their Asian model suggest Korea will slow much more than BOK suggests with numbers generated by their model of 1.9%. (Asia Executive Brief is a monthly document put together by the IMA/ Asia Expertise group of associated consultancies across Asia). This leads to a monthly verbal battle royal with economists wielding statistics, equations and theories somewhat like two wizards fighting (remember the scene in the Lord of the Rings when Saruman and Gandalf fight in the Twin Tower at Isengard). In particular I remind my colleagues that economic forecasting is somewhat akin to weather forecasting, in that timing is also important. Just as a typhoon is predicted to swing across the peninsula, but then goes across Japan or inland in China.Just so economic headwinds can shift, and even the agreed impact of factors on GDP do not necessarily occur in the timing sequence predicted in two different modelling sequences.
Their forecast is top down reaching an annual figure and reluctantly break that result into quarters. I believe forecasting quarterly is the only way to increase reliability the reliability, which allows us to more precisely isolate certain variables and predict the timing of their impact. I first did this in 1980 for Citibank Korea, and correctly forecast the decline in GDP much to the client’s annoyance.
Has the structure changed?
The reader may think I have forgotten structure as I talked at length about performance. One of the most striking examples of structural change is in the same forecast shown below, which shows the contribution of domestic growth and exports to total growth. This shows to my mind the fact that the Korean economic structure has moved from export led to domestic led. Without going into how BOK derived these estimates, the question is how an economy can stand on its head between 1H and 2H 2013 and draw more growth from the domestic side and a fraction of the growth from the export side. The fact is that the domestic economy has been steadily growing in all kinds of directions in the 21st century. Given that Korea has outgrown its old export model and the chaebol are selling less abroad for the most part, it is the energy of the SME sector which is replacing the chaebol that we have worshipped and feared for so long. Many foreign companies selling to Korea know this to be true. When an economy stands on its head, what is up is now down and what is down is now up, and those who track the economy through statistics must reexamine them carefully, their relationships with other factors. Otherwise we miss the important growth points of the future.
And what do I think about the current BOK forecast for 2017?
For that you would need to attend the KBF meeting on August 18th. At that moment in presenting the future forecast I also give myself a grade on the forecast I gave a year earlier. Right now we are finishing our research on the Chaebol to deliver the 2015 score card on Thursday 21st.
KBF is a membership organization operating in Korea since 1991. It is allied with a network of meetings across Asia from India to Indonesia. Members of the Seoul organization are free to attend the rest of the regions meetings. Please note that only a limited number of non members are admitted to any one session.
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