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KERI Bulletin

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KERI Bulletin

KERI Economic Bulletin (Dec. 2003 No.34)

03. 12. 31.


Despite robust exports, the Korean domestic economy in 2004 is expected to post moderate growth of 4.8%, tempered by a sluggish recovery of domestic consumption.

The firming economic recovery in the U.S. and continuation of rapid growth in China are expected to offer a favorable external environment. In contrast, domestic demand, private consumption, in particular, is expected to remain soft next year as weak employment and consumer debt problems are expected to persist for awhile.

The sluggishness in investment has lasted several years thus far, obviously putting pressure on the extant production capacity. Yet, a number of negative variables such as labor-management discord, political instability, anti-business sentiment, etc. continues to dampen the investment sentiment of businesses. Therefore, annual facility investment growth is projected to hover at the 6% level, which is a relatively slower than the average pace seen during past recoveries.

The current account surplus is expected to decrease to about US$4 billion in 2004 from US$8.6 billion in 2003. Consumer prices are likely to stabilize at the 2% level due to light price-push pressure, with an international oil price decline and won currency appreciation amid a slow recovery of total demand.

The 2004 economic growth projection crucially hinges on the performance of exports. There are potential pitfalls that could affect exports negatively. First, the U.S. economic recovery and China's robust economic growth rate trend may slacken if the external environment sours due to full-scale trade frictions or terrorist threats. Second, the gradually-intensifying Chinese yuan appreciation pressure may depress the brisk growth trend in China, which has emerged as Korea's largest export market, and prompt appreciation of the Korean won, which will adversely affect Korea's exports.

In 2004, macroeconomic policy should take into account the possibility of the current weakness in domestic demand persisting into the year. As for fiscal policy, a front-loading of fiscal outlay will likely be necessary. If the weakness in domestic demand persists, a more proactive posture is called for, including a limited amount of budget deficit for the year. Regarding monetary policy, an additional interest rate cut may need to be contemplated in light of the recent stable price trend and weak domestic demand.

Efforts should be made to minimize ill-effects of non-economic unstable factors that are negatively impacting economic sentiment at present, such as North Korea's nuclear problem, political instability and conflicts among various interest groups. As for the labor-management issue, in particular, a balanced relationship must be established based on the rule of law.

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