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World Economy

OPEC Monthly Oil Market Report – August 2017

15

South Korea

The economy in South Korea is preforming well, but some indicators send mixed signals and also the

external political challenges in the region persist. While consumer sentiment is holding up well, industrial

production and some lead indicators point at some challenges in the near-term. After GDP growth in 1Q17 of

3.0% y-o-y, 2Q17 growth was slightly lower at 2.7% y-o-y. While investments remained strong in 2Q17, rising

by 12.7% y-o-y, even better than the 12.1% y-o-y in 1Q17, exports fell by 0.2% y-o-y in 2Q17, after rising by

3.9% in 1Q17. Industrial production rose by 1.5% y-o-y in June, compared to 2.6% y-o-y in May and 3.5%

y-o-y in April. The latest PMI number for the manufacturing sector in June also indicated some slow-down, as

it moved back below the growth-indicating level of 50. It stood at 49.1 in July, after 50.1 in June. While some

softening signs appeared recently, the solid 1H17 momentum led to an upward revision in 2017 GDP growth

to 2.6% in 2017, up from 2.5% in the previous month. Growth in 2018 remains unchanged at 2.4%.

OECD Europe

Euro-zone

The latest indictors in the Euro-zone have confirmed that the economic dynamic has continued and is likely

to also continue in the 2H17. After GDP growth of 0.5% q-o-q seasonally adjusted (sa) in the 1Q17, GDP

growth in the 2Q17 even rose to a level of 0.6% q-o-q sa. The positive trend is visible in all economies at

different rates, and while Germany is leading the growth, peripheral economies are supporting this growth

trend as well. While the labour market has constantly improved, it may further support economic growth as

the unemployment level still remains high. Also, core inflation is still low and may provide some further room

for improvement. The European Central Bank (ECB) has hinted already that its monetary stimulus will

gradually be reduced at some point, but the accommodative monetary policy stance may continue for some

more months as the most recent slow-down in inflation will certainly be taken into consideration in such a

decision. Business sentiment is also reflecting the improving situation, with the European Commission’s

July’s economic sentiment index improving to a level of 111.2 from 111.1 in June. This positive sentiment in

combination with comments by the ECB’s president about a possibility of reduced monetary stimulus has

impacted the euro, which rose to its highest level since the beginning of the year, when it stood at more than

$1.18/€ at the end of June. Some more challenges remain, however. The debate about sovereign debt levels

in some Euro-zone economies has died down somewhat, but sovereign debt levels in several economies

remain high such as in Portugal, Greece, Spain and Italy.

The

unemployment rate continued improving

in June as it fell to 9.1%. This is still an elevated number but

the lowest since 2009. Wages increased by 1.52% y-o-y in 1Q17 at the same level in 4Q16. This compares

to pre-crisis levels of 2% and more. Hence wages remain low but should be expected to pick up further at a

later stage in the recovery and could constitute the next level of the improving labour market. The improving

labour market is, importantly, a positive driver for inflation and a signal of an improving economic

environment. However, the developments differ widely still within the Euro-zone as the latest available

unemployment numbers from June show. Germany’s unemployment rate stood at 3.8% in June, down from

3.9% in May, while in Spain, it was still at 17.1% in June, comparing to 17.3 in May. The still relatively high

unemployment level in the Euro-zone seems to have so far kept wages from increasing quicker and may

keep core inflation in check for the coming months still. While inflation has risen since last year’s low levels,

the recent July number has again underscored the slowing trend. Inflation stood at 1.3% y-o-y in July, the

same level as in June, compared to this year’s peak level of 1.9% y-o-y in April. Core inflation – that is, the

consumer price index (CPI), excluding energy, tobacco and food – moved up slightly to 1.2% y-o-y in July,

from 1.1% y-o-y in June.

As these levels are still far below the ECB’s inflation target of around 2%, it will remain an area that the

ECB

will consider closely in its upcoming monetary policy decision-making meetings. But as inflation is expected

to build up in the coming months, a reduction of monetary stimulus towards the end of the year is still the

most likely scenario, as has been indicated already, but inflation needs to show a convincing upward trend.

Credit supply of financial institutions to the private non-financial sector also seems to have positively

stabilised as it rose by 1.5% y-o-y, matching about the past months average. However, banking sector-

related issues remain, and while the banking sector in the rest of the Euro-zone seems to be in a relatively

better situation compared to last years, the sector is only slowly healing.