Owing to recovery in domestic demand, particularly private consumption, the Korean economy is expected to record 4.5% growth in the second half of this year (3.8% for the whole year) and 4.9% growth next year.

With resolutions of adjustment of household debt to a certain extent coupled with the gradually improving employment conditions, private consumption will likely increase at 4.1% in the second half and at 5.2% next year.

In the second half of this year, facility investment is expected to show a mild recovery at slightly above the economic growth rate, and in 2006, it is projected to expand at about 8%. However, construction investment is likely to experience low growth of 2% to 3% largely as a result of the government's comprehensive and constrictive real estate measures.

Export growth is likely to show somewhat due to high oil prices, the won's appreciation, as well as the expected slowdown in the U.S. and Chinese economies. Nevertheless, it is projected to grow at 12.4% in the second half of this year and 6.8% next year, a comparatively solid growth trend.

As import growth is expected to outpace export growth, the current account surplus is projected to shrink to about US$16.3 billion this year, down from US$27.6 billion in 2004, and is expected to fall even further to US$5.4 billion next year.

Affected by the won's appreciation and other factors, the rate of increase in consumer prices is likely to stabilize at 2.5% in the second half of the year. For 2006, the inflation rate is projected to rise from 2.6% in the first half to 3.0% in the second half of the year, largely due to some upward pressure coming from domestic demand recovery.

Based on the yield of 3-year-maturity corporate bonds, market interest rates are likely to soar from 4.8% in the second half of this year to 5.2% next year due to the more robust economic recovery. The won-dollar exchange rate is expected to appreciate slightly from 1,016 won in the fourth quarter of 2005 to 1,006 won on an annual average next year.

Considering the fact that a negative output gap has accumulated for the past three years, economic growth rates at greater than 5% should entail little inflationary pressure for a considerable period. Therefore, maintaining the current macroeconomic policy tone, including monetary policy and fiscal policy, is desirable in the short term.

In the medium and long term, the growth potential should be boosted through productivity-enhancing technological improvements, a better corporate investment environment and more labor flexibility. However, to ensure that the results of technological development contribute to economic growth, practical commercialization and extensive utilization of new ideas and inventions is imperative and is in turn closely related to how brisk corporate activities are.

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