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KERI Bulletin

KERI Economic Bulletin (Jan. 2006 No.42)

06. 1. 10.

한국경제연구원


Owing to domestic demand recovery, the Korean economy is expected to post 4.9% growth in 2006. This projection is based largely on the expected continued strength in private consumption, which had been the main stumbling block to a strong rebound of the Korean economy until recently.

Influenced by general improvements in consumer sentiment, private consumption is likely to record a growth rate of 4.7%, while facility (including intangible assets) investment is expected to rise by 6.2% on an annual basis thanks to increased investment pressure. In contrast, construction investment is forecast to experience a low growth rate at 1.5% for the whole year under the influence of restrictive real estate policies, as well as a neutral fiscal policy. Exports are expected to maintain double-digit growth thanks to China's continued economic growth.

Consumer prices in 2006 are predicted to post a stable growth rate at 2.9% for the full year, largely helped by the cumulative deflation gap and the won's strength. With contraction in the commodity trade balance surplus and expansion of the service balance deficit, the overall current account balance is projected at a US$6.8 billion surplus, which is significantly lower than the US$16.1 billion surplus of 2005.

Long-term interest rates are likely to maintain a slightly upward trend following increases in policy interest rates and economic recovery. The won-U.S. dollar exchange rates are also expected to experience a mild appreciation.

The near 5% economic growth projected for 2006 is seen as somewhat low, considering the output gap that has been building for the past several years. To sustain a 5% economic growth level for an extended period, it is important to stress more efficient utilization of available manpower resources and increased investment.

To enhance growth potential, it is necessary to improve labor market flexibility allowing jobs of diverse conditions and types in the market. This should also make organized economic activity easier for business start-ups, as well as for existing businesses. To stimulate investment, the corporate investment environment has to be improved. A drastic reduction in regulatory hurdles to business activities is needed.

The government also needs to come up with more pro-active measures to boost capital spending including R&D investment, which has remained sluggish since the 1997 financial crisis.

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