Despite a weak investment sector, the Korean economy is projected to post 5.0% growth in the second half of this year, higher than the 3.2% in the first half, owing to private consumption recovery and a weaker-thanexpected export growth slowdown.

A gradual pick up in economic activities is currently underway. The setback in the GDP growth in the first quarter was due to unusually large inventory draw down. Recent recovery in domestic demand is supported by the increase in wholesale and retail sales and a firmer construction investment, as well as output expansion in the service sector since April.

Exports should continue to post slower growth in the second half as well due to comparison with the high growth of about 30% experienced in 2004, as well as a softer foreign demand and a stronger won. Nonetheless, the growth of exports is expected to rise about 8% on the back of a strong demand from China.

The current account surplus is likely to decline to about US$8.6 billion in the second half of this year from US$10.2 billion recorded in the first half due to comparatively faster slowdown in exports than imports. The won-dollar exchange rate should experience a mild appreciation, settling at an average of about 1,000 won/dollar in the second half of the year. Consumer prices are expected to stabilize at a 3.2% annual growth rate owing to the weak aggregate demand and exchange rate appreciation.

Concerning the fears of a Japanese-style long-term recession in Korea raised by some observers, it is not as likely as speculated, especially when we consider the differences in the economic structure between Korea and Japan. However, if a situation occurs where the external environment worsens severely while the domestic demand remains sluggish, the possibility of a long-term economic slump can not be ruled out.

Therefore, preventing such a possibility should be a top-priority policy task. For this, Korea needs to stimulate investments through activities such as promoting large-scale investment projects for construction of corporate cities and large-scale recreational facilities as well as through stimulating investments from large domestic and foreign enterprises. As a prerequisite, the government must ease various kinds of restrictions imposed on the business areas managed by enterprises and should facilitate the free movement of necessary resources and management expertise between enterprises.