The Korean economy in the second half of 2004 is projected to grow at less than 5.0%, a level lower than in the first half of the year, due largely to a delay in the recovery of domestic demand and a slowdown in the export growth trend. Compared with the first half of the year, export growth in the second half will most likely decline, as it becomes affected by China's belt-tightening policies and a won-value appreciation. Both consumption and facility investment are expected to post a mild recovery on the basis of a technical rebound, while the construction sector is expected to remain soft for the remainder of this year.

With the narrowing gap between export and import growth rates, the current account surplus is likely to be about 7.1 billion won in the second half, down from the 11.8 billion won recorded in the first half of the year. Consumer prices, meanwhile, should rise about 3.6%, which is similar to the first half. The slow recovery in domestic demand, the won exchange rate appreciation, and stabilizing international oil prices are expected to mitigate upward pressures from high oil prices.

Multi-faceted policy efforts will be required to boost the economy and to reduce the risk of extending the current slowdown in economic recovery into the second half of this year and beyond. In addition to additional fiscal outlay, various development projects such as the establishment of free economic zones and special enterprise cities being pursued by regional governments might provide positive stimulus to the anemic Korean economy. These measures should be afforded careful attention and support from the central government.

With the emergence of the new progressive political leadership, concerns seem natural that anti-market and equity-first policies, smacking of populism, may take hold. Though at a very early stage, discussions of a 'wealth tax' and 'compulsory social contribution funds' by businesses are worrisome examples. Such initiatives could worsen anti-business sentiment in Korea and further deteriorate the business environment. Consequently, the government and political leaders should make their positions clear regarding these issues, so as to eliminate uncertainties and serious market concerns.

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