Despite the better-than-expected performances of recently published economic indicators, we decided to maintain our initial projection of the annual growth rate of the Korean economy, which was 4.4%. This is mainly due to the unstable international financial markets caused by the subprime mortgage crisis in the U.S. and the possible liquidation of yen carry trade. In light of the current financial turmoil, we expect the growth rate of the Korean economy to slow down to 4.3% in the second half of this year.

Most of all, we expect Korea's export growth, in terms of the balance of payments, to decline from 13.7% in the first half to 10.1% in the second half as the world economy becomes more vulnerable due to the subprime mortgage crisis.

The current financial market instability is also expected to hamper the robust recovery of facility investment as investors become more wary. The fact that private consumption exhibited a rather tepid growth in the second quarter is another bad news for facility investment. Private consumption has been the most important factor in driving facility investment for the past 10 years. Its slowdown implies that the robust facility investment growth is unlikely. Another factor in slowing facility investment is the strong possibility that cash flow for SMEs and service businesses, which contributed considerably to facility investment growth in the first half, will tighten in the aftermath of the financial uncertainty and recent interest rate hikes.

Private consumption growth is also expected to slow in the second half due to higher energy prices and interest rates. Consumer confidence is already deteriorating due to the subprime mortgage crisis. The current account balance is projected to suffer an annual deficit of USD 0.2 billion. The inflation rate is likely to be higher in the second half of the year.

Considering the negative impact of the financial market uncertainty on the real economy, the government should focus on the stabilization of the overall economy as well as the financial market. The government should proceed cautiously with raising interest rates further as it could prove a huge burden for the economy.

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