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KERI Bulletin

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KERI Bulletin

KERI Economic Bulletin (Mar. 2007 No.47)

07. 3. 31.


The internal and external economic environments for 2007 do not bode well for Korea due to uncertainties in several areas. External factors such as unstable international oil prices, a global economic slowdown, interest rate hikes, and weakening of the dollar pose difficult challenges to overcome. Domestically, upcoming presidential election is likely to heighten the already intense social conflicts and uncertainties about economic policies which tend to be guided by political, rather than sound economic, motives during the election cycle. Moreover, the government's economic stimulus packages do not seem to be having the intended impact on the nation's economy. Consequently, the nation's economic growth in 2007 is projected to slow down to 4.1% from 5.0% in 2006.

A heavier tax burden for homeowners, stagnant job growth, precipitous growth of household debt, among other things, are likely to hamper a robust recovery of private consumption. Equipment investment is also not expected to reach a desirable level due to uncertain economic prospects, insufficient improvement in corporate investment climate and election-related policy confusion. Signs of economic slowdown are already popping up in some areas. The construction industry is bracing itself for difficult times ahead as the number of unsold apartments in the local provinces grows and the leading industry indicators are showing worrisome signs. All these make the forecast of weaker domestic demand more credible.

The current account balance is expected to revert to a deficit for the first time since the financial crisis in 1997. The service sector is sustaining expanding account deficits which is largely due to its weak international competitiveness. In addition, imports are growing at a faster rate than exports. Yet, the upside is that inflation is expected to stay low largely due to stabilizing oil prices, economic slowdown, and appreciating of won.

Reflecting economic recession and price stabilization trends, market interest rates are expected to decrease gradually. Still the won-dollar exchange rate is expected to continue its march downward as the weakening dollar is not likely to reverse its course in the near future. Additionally, revaluation of Chinese yuan will further strengthen the Korean currency. However, these downward pressures are likely to be partially countered by the expectation of deficits in the current account balance, an increase in the volume of outward investment in foreign stocks by Korean nationals, and the government's easing of restrictions on direct investment abroad.

An unexpected setback in negotiations with North Korea on its nuclear capabilities and a sharp decline in housing prices are two notable risky factors that could further exacerbate Korea?'s growth prospects for 2007.

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