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KERI Bulletin

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KERI Bulletin

KERI Economic Bulletin (Dec. 2004 No.38)

04. 12. 30.


In 2005, the national economy is projected to record 4.1% growth, which is lower than 2004 growth(4.8%), primarily due to expected export slowdown. Domestic demand is, however, likely to show a gradual recovery.

Exports are expected to decline markedly in terms of growth rate in 2005 largely due to the slower growth of the global economy, as well as base effects due to the high growth rate of near 30% in 2004, and strengthening won.

on the other hand, private consumption is expected to grow in the 3% range owing to a gradual improvement in the employment situation and technical effect following two years of sustained consumption shrinkage. Facility investment also is forecast to continue at a 8% level of growth thanks to accumulated investment pressure from this year's brisk export performance and improvements in the financial condition of businesses in the manufacturing sector.

The current account balance is projected to record about US$13.3 billion next year, which is only about half the US$27 billion in 2004, reflecting the export growth slowdown. Rise in consumer prices will likely be moderate. Owing to more stable oil prices and a strong won, we expect 3.2% CPI inflation for the year. Affected by expansion of the U.S. budget and current account deficits, the won-dollar exchange rate is expected to fall to an annual average of around 1,020 won.

Downside risk factors related to our baseline forecast are the possible recurrence of high oil price, substantial slowdown of the global economy, acceleration of the won's appreciation, deepening of conflicts in domestic politics and society which would further depressing economic sentiments and delaying a recovery in domestic demand. Should all these factors materialize, economic growth rate could fall as low as 2.8%.

As for future policy tasks, the government should pursue expansionary fiscal and monetary policies to stimulate domestic demand in preparation for the expected export slowdown. Tax reductions should be pursued more actively. With respect to foreign exchange rate policy, a more measured intervention is called for as expectations about the Chinese yuan revaluation make Korean FX authorities' stabilization efforts less effective.

The government should make efforts to resolve high level of political and societal tentions. Controversies caused by the ruling party's attempt to abolish the NSL(National Security Law) and other progressive agenda have proved bit too divisive so far. A more gradualism seems to be in order.

Various regulations and systems restricting corporate investment must be improved steadily, and the government should maintain its recent policy of self-restraint regarding unnecessary intervention in labor-management affairs while respecting laws and principles.

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