The Korean economy is projected to grow 2.4% in 2009, which is the lowest level since the 1997 financial crisis. The forecast growth rate has been downgraded from our October projection of 3.8%. A sharp decline in export growth due to the global economic contraction is cited as a main reason for the downgrade. Domestic demand is expected to remain fairly vulnerable as the labor market conditions worsen and the households face declining income amid tight credit conditions. The economy is expected to rebound starting in the second half of 2009 as stimulus packages both domestic and international begin to gradually take effect.

The current account balance for 2009 is expected to record a surplus in the neighborhood of US$16 billion. Sharp declines in import demand and international oil price are cited as major factors. Consumer inflation rate is expected to remain stable at around a low 2% level due to declines in prices of international oil and commodities and domestic demand. on the other hand, the Korean won-U.S. dollar exchange rate is likely to remain at a relatively high level for the time being. However, there is some possibility that the Korean currency would appreciate sharply against the U.S. dollar beginning in the second half of 2009 due to global weakening of the dollar and Korea’'s current account surplus. on average, the exchange rate between the two currencies is expected to be around 1,210 won per dollar.

It should be noted that the current projections are based on the assumption that the Chinese economy will make a soft landing with 8.5% growth in 2009. If China's stimulus packages fail to produce desired effects, the Korean economy's growth is likely to fall to a 1% level.

With weaker export markets, reviving domestic demand to jump-start the economy becomes an even more urgent policy task. An important challenge is to create stable jobmarket conditions so as to prevent further contractions in private consumption. Daunting as it is, structural reforms in key sectors such as construction and shipping industries are needed to improve market conditions and create more favorable conditions for job creation. To this end, the government should ease restrictions on the use of part-time workers, prevent unnecessary layoffs and create additional employment through adjustment of working hours and permission for diverse employment types.

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