Korea's economy is expected to grow 4.1% in 2005 with domestic demand recovering gradually. Export growth is likely to decline, however, due to contraction in the growth of the global economy, technical effects caused by the high growth in exports of over 30% in 2004, unfavorable foreign exchange rates, and other factors. on the other hand, private consumption is expected to recover gradually owing to the base effect of the previous two years of sustained stagnation and the government's measures to stimulate domestic demand, including expansionary fiscal policy. Facility investment should achieve 7% growth, affected by an investment pressure build-up following the brisk export performance to date and improvements in the financial situation of enterprises in the manufacturing sector.

The current account surplus in 2005 is forecasted at US$19.7 billion, which is somewhat lower than last year's US$27.6 billion, and is affected mainly by the expected slowdown in export growth. The won-dollar exchange rate will likely appreciate to an annual average of 1,010 won per US$ largely due to the weakening greenback.

Inflation in consumer prices is expected to stabilize at 3.2% thanks to still soft aggregate demand and the strengthening won value. However, inflation could reach the 4% level if high oil prices persist.

Maintaining the current expansionary macroeconomic policy stance is important to ensure the survival of a nascent recovery in domestic demand in the short run. In particular, efforts have to be made to minimize inconsistency and appearance of discord among various policy makers. Policy makers also need to consider contingencies in the event that the external environment deteriorates further. Persistent high oil prices warrant continued vigilance, for example.

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