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KERI Bulletin

KERI Economic Bulletin (May 2007 No.48)

07. 5. 30.

한국경제연구원


The internal and external environments for 2007 appear improved compared to December 2006. The brighter outlook is due in part to the agreement reached at the six-party talks in February this year, bringing hope that North Korea's nuclear uncertainty could be mitigated, and to the positive effects expected from the Korea-US FTA conclusion. The global economy is expected to maintain its brisk pace of growth, albeit at a slower rate than in 2006 due to a slowdown in the U.S. economy.

Considering the improved environments at home and abroad, Korea's economic growth (real GDP base) is revised up 0.3%p from the previous projection of 4.1% to 4.4% for 2007. The upward revision reflects the faster-than-expected recovery in domestic demand, including consumption and investment, in the first quarter of this year.

Economic indicators in the first quarter show that the economy is gradually beginning to recover. Furthermore, alleviation of North Korean nuclear risk and the conclusion of Korea-US FTA negotiations should provide more fuel to hasten the recovery process. For these reasons, quarterly growth rates of the economy are expected to improve with the first quarter as a baseline.

Consumer prices are expected to rise in the low 2% range in the first half of this year due to stabilization of international oil prices, a favorable foreign exchange rate, etc., but are likely to rise faster in the second half due to an increase in public utility charges and domestic demand recovery.

With the service account deficit exceeding the goods account surplus, the current account balance is expected to record a deficit of about US$4 billion in 2007 for the first time since the foreign exchange crisis in 1997. The deficit in the service account may expand further due to the domestic service sector's poor competitiveness and a growing demand for overseas services.

A slowdown of the U.S. economy, U.S. current account deficit, and a narrowing interest rate gap between the U.S. and the EU are contributing to global weakening of the U.S. dollar. As such, Korean won will continue its appreciation against the U.S. dollar this year. Market interest rates are projected to rise gradually thanks to a recovering domestic demand and inflationary pressures.

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