Economic Growth Projected at 2.7% in 2003 and 4.4% in 2004

With sluggish domestic demand expected to persist, economic growth for 2003 is likely to post a mere 2.7%, less than half of 2002's rate of 6.3%. Despite robust performance anticipated for exports, the setbacks in private consumption and facility investment will continue through the second half, with negative annual growth forecast for both types of spendings in 2003.

The growth for 2004 is projected to be a lackluster 4.4% as well, mainly due to a stalled consumption recovery. Exports are expected to be strong also in 2004 with anticipated improvement in external conditions such as the U.S. economic recovery. However, since weak structural factors - stagnant employment, high household debt, etc.- are unlikely to improve in the short term, private consumption will become a factor in holding back the economic growth rate. Nevertheless, facility investment is expected to post a mild recovery and increase 7%.

As for economic policy direction, it is necessary to consider more aggressive macroeconomic policies to prepare for the possibility of prolonged doldrums in domestic demand. In terms of the current year's budget, the 4.5 trillion won supplementary budget enacted in July appears insufficient to cover the shortfall in the second half of this year, a direct result of the frontloaded spending early this year of about 8.8 trillion won. In regard to monetary policy, there will be room for an additional interest rate cut in view of the stable trend in prices. Efforts should also be made to resolve factors behind debilitating uncertainties that have weighted on economic sentiment such as the North Korean nuclear problem, a lack of coordination in government policies, and militant labor actions. In regard to labor-management issues, in particular, balanced relations must be established on the rule of law. To escape the vicious investment slowdown - employment slowdown - consumption slowdown cycle, solutions to expand growth potential must be developed through stimulating investment. Various systems and regulations restricting corporate activities need to be re-examined. In addition every possible economic incentive that holds the potential to promote investment has to be considered, including more inducement policies for foreign investment in Korea, in parallel with efforts to reverse the negative sentiment of domestic enterprises.

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