Economic growth (GDP basis) for 2008 is projected at 5.1%, which is higher than the estimated growth rate of 4.8% for 2007. Although the external environment has deteriorated markedly, KERI remains cautiously optimistic about Korea's growth prospects for 2008 due to favorable developments in the domestic market. In contrast to the tumultuous international market conditions, domestic demand is showing healthy signs of recovery. The fact that the newly elected government is not shy about its growth-oriented and market-friendly stances serves as a key factor. on top of the recovery trend in domestic spending, the export sector remains strong as it has been successful in increasing market diversification and enhancing product competitiveness. Regional stability resulting from reduction of the North Korean nuclear risk is an additional factor that allows us to maintain guarded optimism.

Inflationary pressures will increase in 2008 as consumer prices are expected to grow around 3% due to robust domestic demand and rising prices of international commodities. The last time prices rose by this magnitude was in 2004 when they increased 3.6%. The current account balance is also projected to return to a deficit of about US$1.4 billion, for the first time in 10 years, due to expanding domestic demand and the service account deficit.

Apart from the positive developments mentioned above, it is important not to ignore the potential risks posed by the international credit crunch and global inflationary pressures.

For starters, the new government needs to stabilize the domestic financial market by easing credit conditions. It also needs to put into place measures that can shield the Korean economy from global inflationary pressures. Current economic conditions provide little wriggle room for the government in terms of interest rate policies. As such, policy makers will have to be extremely careful not to throw the economy off track by taking an undue tightening stance. Implementing the tax relief measures pledged by the president-elect at the earliest possible time would provide some breathing space for the policy makers themselves as well as the recovering domestic market.

Domestically, the new government should initiate regulatory reforms to foster robust corporate investment at the earliest possible date. It also needs to firmly commit to upholding the principles of law and order in the process to ensure social stability. During the transition period, the newly elected government should cooperate with the current government and take necessary steps so as to ratify the Korea-US FTA in the early days of the new administration.

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