Jul / 2008 Jun / 2008 May / 2008 Apr / 2008 Mar / 2008 Feb / 2008 Jan / 2008 Dec / 2007 Nov / 2007 Oct / 2007 Sep / 2007 Aug / 2007 Jul / 2007 Jun / 2007 May / 2007 Apr / 2007 Mar / 2007 Feb / 2007 Jan / 2007 Dec / 2006 Nov / 2006 Oct / 2006 Sep / 2006 Aug / 2006 Jul / 2006 Jun / 2006 May / 2006 Apr / 2006 Mar / 2006 Feb / 2006 Jan / 2006 Dec / 2005 Nov / 2005 Oct / 2005 Sep / 2005 Aug / 2005 Jul / 2005 Jun / 2005 May / 2005   Infomag  〉 Rising Costs Jul / 2008 Galloping inflation, won depreciation, and tepid private consumption are exerting downward pressure on the Korean economy. To add to it, the week-long truckers strike took its toll! (By Ram Garikipati) Record crude oil and raw material costs continue to weigh heavily on the economy, offsetting the impact of trade. The current account posted a deficit of $5.2 billion in the first quarter of this year. In particular, the goods account recorded a deficit, the first such shortfall since the financial crisis in 1997. The rising won-dollar exchange rate also put upward pressure on consumer prices, which are hovering over the Bank of Korea’s target growth of 2.5-3.5 percent since December last year. Korea’s consumer prices grew at the fastest pace in seven years in May on higher prices of energy and other commodities, breaching the central bank’s inflation target range for a sixth straight month, a government report issued in early June showed. The consumer price index jumped 4.9 percent last month from a year earlier, according to the National Statistical Office. May's annual inflation was the highest since a 5 percent gain in June 2001. It was also up 0.8 percent from a month earlier. “Inflationary pressure seems to be stronger than had been expected as higher commodity costs and a weak local currency are driving up prices” said Jeon Min-kyu, an economist at Korea Investment & Securities. “The data might hurt consumer sentiment, leading to a decrease in domestic demand, which is a key growth engine for the nation's economy.” According to industry data, the price of Dubai crude, Korea’s benchmark, nearly doubled over the past year. A weak local currency added upward pressure on inflation as it makes imports more expensive. The won depreciated around 10 percent against the U.S. dollar this year alone. The Bank of Korea (BOK), the country’s central bank, sets its inflation target range at 2.5 to 3.5 percent and the Finance Ministry is pushing to keep the inflation rate below 3.5 percent for this year. Consumer prices climbed at their fastest rate in nearly seven years in May, led by rises in petroleum and food, while Koreans’ purchasing power between January and March declined. Inflationary pressure may continue to build as the effects of rising crude oil prices are expected to spill over to other sectors of the economy. The Korea National Statistical Office said in a release that consumer prices rose 4.9 percent in May from a year earlier and 0.8 percent from the previous month. “International crude oil prices hit new highs in May, and the prices of petroleum products in Korea rose sharply,” said Kim Beom-seok, a director at the Ministry of Strategy and Finance’s economic policy department. The price of Dubai crude, Korea’s benchmark, soared by 15 percent in May compared to April. Korea depends entirely on imports for its crude oil. Soaring raw material prices coupled with the weaker won are sending consumer prices steadily higher. Consumer prices rose 3.6 percent in February, 3.9 percent in March and 4.1 percent in April and 4.9 percent in May. The Korean won has fallen about 11 percent this year against the greenback, as demand for the U.S. currency grows to purchase raw materials. “Consumer prices are expected to peak in the second quarter of this year due to high import prices and a weak won,” said Kwon Soon-woo, a senior economist at Samsung Economic Research Institute. “Since it takes time for high commodity prices to be reflected at the consumer level, prices in June may rise even faster.” Among the 52 necessities whose prices are monitored by the Lee Myung-bak administration, 28 items appreciated in May compared with April, partly due to rises in international grain prices. Pork prices jumped 11.4 percent as avian flu and the controversy over beef safety led to increased pork consumption. Higher animal feed costs due to rising international grain prices and fewer pigs were also important factors. The number of pigs fell 6.5 percent to 8.9 million in March from December. Cooking oil prices climbed 6.3 percent due to rising international soybean prices. The price of diesel, gasoline and liquefied petroleum gas climbed 9.3 percent, 6.2 percent and 3.5 percent, respectively. Rising prices are sharing the economic stage with sinking gross national income. The Bank of Korea said yesterday that first-quarter real GNI income dipped 1.2 percent from a quarter earlier, the largest quarterly slide since 1.6 percent in the first quarter of 2003. Real gross national income reflects the population’s actual purchasing power. Income growth has failed to keep up with the rapid pace of inflation, according to the central bank. Import prices also leaped due to soaring oil prices and the won’s declining value versus the dollar. Exports underwent smaller price increases. Raw material prices for May also marked the steepest year-on-year climb since January 1980 when the Bank of Korea (BOK) began to track such data, driven largely by import price increases in mining and industrial products (coming from skyrocketing international raw material prices coupled with an upsurge in the won-dollar exchange rate). An official from the central bank stated, “Import prices of raw materials moved sharply upwards by 83.6% year-on-year in May, the largest increase since 1980 when we started compiling such data. The price spike reflects a similar pace of import price rises for raw materials that we reported on June 13 since raw material prices tend to be directly affected by rising import prices of raw materials.” According to the BOK’s “May 2008 Trends in Stage-of-Processing Prices” report, the combined price index of raw materials and intermediate goods leapt by 34.6% year-on-year in May, the highest increase since March 1998 (immediately after the currency crisis) when the comparable gain was 35.7%. In addition, the reading advanced 7.6% on a month-on-month basis. Leading the surge in the index was the rise in prices of raw materials, which shot up by 79.8% year-on-year. This marked the third straight month of above-50% year-on-year increases beginning with the 52.4% ascent posted in March. The month-on-month increase was 15.9%, accelerating from the 6.6% growth posted in April. More specifically, prices of mining1 and industrial2 products rose the highest by 18.3% and 15.5% from April respectively, contributing most to the overall increase. Prices of agricultural products also climbed 2.6% during the same period. Boosted by the high uptick in raw material prices, the price of intermediate goods also peaked 23.1% from a year ago. The year-on-year increase has been at its fastest pace since July 1998. Compared to the previous month, prices increased 4.8%. The galloping month-on-month price increases in oil-related (10.7%) and assembled metal (6.7%) products triggered overall intermediate goods prices to accelerate by a large margin. Specifically, prices of input metals and chemical products and food/beverages/tobacco registered 5.7%, 5.1% and 3.2% month-on-month increases, respectively. Thus, prices of finished goods escalated 6.8% from a year earlier, also posting the biggest year-on-year gain since a 14.6% surge in November 1998. On a month-on-month basis, the figure also rose 1.6%. Broken down by product category, prices of industrial products grew 2.4% from the previous month; the gain more than offset a 2.9% decline in the prices of agricultural/forestry/marine products (affected by rising crops). The future outlook is not bright, either. An official from the BOK stated, “Given that oil prices (which take up the largest portion in raw material prices) for June are unlikely to drop compared to May levels, prices of raw materials are anticipated to move much higher in the foreseeable future.” Indeed, the state-run Korea National Oil Corporation reported that monthly average spot prices of Dubai crude oil (which comprise 80% of Korea’s oil imports) continued its record-breaking march for the fifth consecutive month this year to reach $119.5 per barrel in May, breaking the previous high of $103.6 recorded in April. Policy Issues Korea's economy, Asia's fourth largest, grew 0.8 percent in the first quarter of this year, the slowest quarterly expansion since the fourth quarter of 2006, on sluggish domestic consumption and corporate spending. The BOK forecast that the economy will grow 4.7 percent this year, down from a 5 percent expansion last year. The government aims to achieve growth of some 6 percent but it recently admitted that the economy has reached its "peak" and is now entering a "downward phase." The higher-than-expected inflation rate might reduce the room for the BOK to cut its key interest rate despite mounting pressure for a cut aimed at boosting the slowing economy. In general, the challenging environment points to a slowdown in the Korean economy that will become evident in the second half of this year. In response to this, the government also unveiled a package of emergency inflation-taming measures in a bid to stabilize local consumer prices. "As part of the anti-inflationary steps, the government will lower or eliminate import quota tariffs for a total of 82 items in the categories of grains, raw materials and agricultural and petrochemical goods," said Presidential Spokesman Lee Dong-kwan after President Lee Myung-bak presided over a meeting of economy- related ministers at the presidential office. "Notably, the government will eliminate import tariffs on 90 percent, or 70, of the concerned products, effective from April 1, " the spokesman said. Meanwhile, the government announced a plan to freeze almost all public utility rates, including public transportation fees, and tap water charges, through consultations with provincial governments and public corporations. It also decided to increase the weekly output of aluminum, copper, nickel and other nonferrous metals by about 40 percent to 4,800 tons. "The president and economic ministers expressed concern over soaring global prices of oil and other raw materials during the two-hour meeting and agreed to file a list of 50 major products for intensive inflationary oversight," said the spokesman. The government will intensively monitor 50 products, including rice, pork, cabbage, radish, garlic, egg, milk and ramyon, as they are mostly consumed by households in the bottom 40 percent income bracket. The spokesman said the government will no longer be able to unilaterally push for price controls and thus will pursue market- friendly measures through the diversification of import sources and utilization of alternative goods. The spokesman said other anti-inflationary measures would include an overhaul of distribution channels of agricultural and livestock products and the provision of low-interest loans to low income households incapable of coping with rising housing rents. As inflation soars in Korea, railroad fares, water bills and the price of garbage bags will be frozen this year. Bus and taxi fares will also be kept to a minimum. The calls were madein a meeting presided over by Minister of Strategy and Finance Kang Man-soo that discussed ways to help low-income families overcome inflation. Ministers and Kim Choong-soo, senior Blue House secretary for economic policy, agreed to curtail increases in utility and transportation costs and to spread out any rises over time. The government will provide subsidies of 1.2 trillion won ($1.2 billion) to electric and gas companies to make up for losses resulting from the price freeze. However, the government may not be able to hold utility costs down forever. “Utility costs have been frozen but it isn’t good to keep costs such as electric bills down without a definitive plan,” Kang said. The government intends to discuss with regional governments ways to minimize utility cost increases. To keep bus and taxi fares steady, the government will provide 2.9 trillion won in subsidies to bus and taxi companies if necessary. Monitoring efforts aimed at keeping educational expenses from rising too much will also be boosted. Special attention will be paid to whether educational institutions unfairly raise the cost of teaching materials and exams. Further, the Korea Customs Service will reveal the import prices of 90 necessities every three months on its Web site. It will also compare necessity prices in Korea with other countries. The Ministry of Knowledge Economy, Ministry of Land, Transport and Maritime Affairs and National Tax Service plan additional crackdowns on rebar hoarding in mid-June. Price-fixing and monopolies in the oil, mobile telecommunications and automobile sectors and on medical and educational services will also be watched. In addition, the Ministry of Strategy and Finance is currently reviewing the projections made in March and any changes will be included in the second-half economic outlook to be published early next month. Recent projections showed that the government expected the national economy to grow by about 6 percent while consumer prices would increase by about 3.3 percent this year. The earlier outlook also projected that an additional 350,000 individuals would find employment, and that a current account deficit of $7 billion would be recorded this year. Although officials said that the details of the changes had not been finalized, the growth prediction was likely to be lowered to the 5 percent range. Although the new projection will likely be lower than the earlier projected 6 percent, the government is not expected to lower the forecast to match the growth rates projected by private think-tanks and international organizations. The Samsung Economic Research Institute lowered its projection from 5 percent to 4.7 percent while LG Economic Research Institute lowered it to 4.9 percent. The Organization for Economic Cooperation and Development lowered its projection for Korea from 5.2 percent to 4.3 percent while Bank of Korea Governor Lee Sung-tae forecast a growth rate below 4.5 percent. For the rate of inflation, the government is expected to raise the projected value to the mid to upper 3 percent range. The government originally projected an inflation rate of 3.3 percent, but consumer prices have increased by 4 percent during the first five months of the year and inflation is expected to continue at similar rates for the foreseeable future. In reflection of the domestic slowdown, the government is likely to also lower its employment projections for the year. During the first five months of the year, the number of employed people increased by less than 250,000 each month reaching a year low of 181,000 in May. In light of such developments, the government's employment projection is likely to be lowered to about 300,000 from the initially forecast 350,000. For the country's current account balance, the prediction of a deficit of $7 billion seems likely to be kept despite soaring oil prices due to improvements in its service accounts balance. However, the argument that the country's trade balance may go into the red for the first time since 1997 is gaining support. Rising oil prices have caused imports to rise faster than exports, and for the first five months of the year the country has recorded a trade deficit of $5.28 billion. Stabilizing Prices Korea’s government will focus on stabilizing prices as it battles to revive its popularity with voters who are unhappy that their spending power is being eroded by the fastest inflation in seven years. “We’ll put utmost priority on stabilizing prices and looking after the lives of the people,” Finance Minister Kang Man-soo said at the start of a government meeting in Gwacheon to discuss economic policy. Kang’s comments confirm the government has switched its focus from spurring economic growth to controlling inflation following a plunge in President Lee Myung-bak’s approval rating and strikes that crippled the nation’s ports. Lee said on the government will focus on curbing prices. “The government has made official its policy shift from growth to inflation,” said David Kim, economist at Woori Investment & Securities. “Korea needs more focus on prices more than anything else, especially after rising prices caused more social uproar and strikes.” Oil prices have doubled over the past year, raising living costs and companies’ production expenses. The consumer inflation rate accelerated to 4.9 percent in May, exceeding the central bank’s target range for a seventh month, and economic growth slowed to 0.8 percent in the first quarter, the weakest pace in more than a year. Kang’s statement is in contrast to May 6 when he said faster inflation was “inevitable” as food and fuel prices climb. He had previously indicated he wanted the central bank to lower interest rates to help drive economic growth, saying the nation’s borrowing costs were “higher” than many other economies. The Bank of Korea ignored his urgings on June 12 when it kept its benchmark interest rate at 5 percent, the highest level in seven years, saying the risk of faster inflation outweighs concern that economic growth is slowing. The central bank’s policy makers next review borrowing costs on July 10. “The economic conditions have greatly changed with oil price hikes going far beyond expectations,” a Finance Ministry official, who refused to be identified, told the JoongAng Ilbo. “We are revising the targets of economic indicators. We will release them when we announce the second-half economic management plan early in July,” he said. According to him and other officials, the gross domestic product growth target could be lowered from the 6 percent set in March to around 5 percent, while the consumer inflation target could be raised from the current 3.3 percent to above 4 percent. The Finance Ministry had already said consumer prices could rise by more than 4 percent year on year for a while, if international oil prices continue to rise. Separately, IMF Deputy Managing Director Takatoshi Kato said in an interview with Yonhap , “We do expect [Korea’s] growth to slow this year, most likely to somewhere in the range of 4 to 4.25 percent, before beginning to recover in 2009.” “With inflation rising throughout Asia and signs emerging that price increases are becoming more generalized, the priority at this stage in Korea and many other countries is to ensure that inflation expectations remain anchored down,” Kato said. “Once there are clear signs that inflation is moderating, some stimulus could become appropriate.” The country’s consumer prices jumped by a seven-year high of 4.9 percent in May, buoyed by soaring oil prices. Adding to fears of stagflation, Bank of Korea data showed that companies’ spending on machinery declined 2.8 percent on year in the first quarter, compared to a 2.8 percent increase in the previous quarter. Quarter on quarter, the spending declined 0.9 percent. Lim Kyung-mook, a research fellow at the state-run Korea Development Institute, said the weakening of the local currency is one reason for sluggish corporate investment, as it has caused price increases for imported capital goods. Facing this situation, the Finance Ministry, which had supported the weak won and low interest rates to boost exports and economic growth, recently changed its position. And the central bank, which had consistently emphasized the importance of curbing inflation, left its key interest rate unchanged at 5 percent in June for the 10th straight month. Korea’s economy is racing toward the early stages of stagflation with all economic indicators, except exports, pointing to weaker growth and consumers reeling from growing inflation. Some critics claimed that incompetence by President Lee and his policy makers is to blame for the economic worries. “Of greater concern is the fact that there is no one to regulate and rectify these problems,” the nation’s largest-circulation daily, the Chosun Ilbo, said in an editorial titled “Is anybody in control of the economy?” There is talk of disagreements among chief policy makers at the presidential office, and Kim Joong-soo, the chief economic secretary, didn’t appear to be in control of the situation, the editorial said. “In other words, nobody is in control of economic policy, which is why this administration appears so shaky in its handling of the economy,” it said. Other Measures The head of the antitrust watchdog also vowed to crack down on illicit activities to help curb runaway consumer prices. "As inflation expectations are rampant, we have been monitoring price-rigging and other business activities that would distort pricing in the market," Baek Yong-ho, the head of the Fair Trade Commission, told a meeting yesterday. Economists say high inflation expectations influence actual inflation and price hikes of necessary products and services. In May, consumer prices rose 4.9 percent from a year ago, the fastest pace in seven years. Central bankers and Finance Ministry officials appear to share the anti-trust regulator's view, saying that pervasive price increases in restaurants and the services industry, mainly led by self-employed shop owners, complicate their job. Those service businesses have been largely insulated from surging commodity prices. Some manufacturers have already factored the expected price increases into their price adjustments, officials at the Bank of Korea said. The retail price of a product, for example, might rise by 1,000 won, outpacing a 500 won gain in raw materials. "This kind of pricing policy could fuel the already rife inflation expectations," said a central bank official. Vice Finance Minister Bae Kook-hwan said in a radio show that the government would have no choice but to increase energy and electricity prices if oil prices rose further. The Cabinet approved an extra budget of 4.9 trillion won ($4.7 billion) to support low-income people hit by skyrocketing energy prices. A significant portion of the budget will be allocated to make up for losses incurred on state-owned energy companies so that they do not have to transfer commodity price increases to consumers, the vice minister said. "Further oil price increases will make it tough for us to bring electricity prices under control," he said. Bae forecast that the extra budget could boost economic growth by 0.7 percentage point and consumer prices by 0.01 percentage point this year. Inflation expectations drive wage demand, and many experts say surging consumer inflation will be a top agenda among labor unions during the current wage negotiation season. Labor union groups and management's associations have so far failed to reach agreement to set a minimum wage for 2009, according to the Federation of Korea Trade Unions. Management is insisting on a wage freeze, whereas workers are calling for a 990 won increase in payment by the hour to 4,760 won, citing soaring price increases. Price hikes, rising unemployment and the public's discontent with the government's policy has manifested in consumer sentiment, say analysts, noting a sharp decline in May's Consumer Expectation Index. "Inflationary pressures appear to have begun to affect consumer spending in the second quarter," said Lee Chae-kwang, a market strategist at Korea Investment & Securities Co. The antitrust watchdog plans to bolster its monitoring of the five designated industries directly affecting everyday lives - oil, mobile phone services, private education, automobiles and medical services. "We plan to intensify our crackdown on illegal practices that abuse positions of market dominance," said FTC chairman Baek. The FTC has recently extended its probe into local instant noodle manufacturers, refineries, gas stations and hospitals over price-fixing allegations. Last week, the FTC said that it was also probing allegations involving local department stores. Truckers Strike In a related development, a week-long strike by Korean truck drivers has cost Asia's fourth-largest economy about $5.92 billion in lost trade, dealing a blow to the main growth driver. The strike disrupted $2.89 billion worth of exports and $3.03 billion worth of imports between June 12 and June 17, the Ministry of Knowledge Economy said. That's about one percent of the value of Korea's total trade in the previous month. As many as 13,496 truck drivers, including members of the Korea Cargo Workers Union, stopped moving freight nationwide from June 11 to protest surging fuel costs, demanding higher transport fees and bigger government fuel subsidies. About 30 companies including LG Chem Ltd., Hanwha Chemical Corp. and Honam Petrochemical Corp. had trouble in operating plants in Korea's largest petrochemical complex in Yeosu, where truckers were blocking the entrance of the complex, according to Cho Hyun-deock, assistant director at the Ministry of Knowledge Economy. Overseas shipments, which made up about half of the economy's 0.8 percent expansion in the first quarter, jumped 26.9 percent in May from a year ago, a report by the Korea Customs Service showed. ``It's more bad news for the export-driven economy facing record oil and quickening inflation,'' said Lee Sang-jae, an economist at Hyundai Securities Co. in Seoul. ``This could hurt exports and factory output this month.'' Hyundai Motor Co., South Korea's biggest automaker, said that shipments of finished vehicles in the local market were only half the normal levels, though exports had been unaffected. Truckers have also blocked gates at plants operated by Posco, the nation's biggest steelmaker. The Korean government and the ruling party agreed to form a task force to work out measures to improve the current multi-step cargo transportation system during an emergency meeting on 15th June. Pointing out that truckers only take home 60%-70% of the transportation fees paid by their clients, government officials and Grand National Party lawmakers stressed that consignors and companies in the transportation industry must take an active role in "sharing the burden (of truckers)". They agreed to create a task force - including experts, government officials and industry representatives - to devise necessary laws and policies aiming to alter the transportation system across the country. "The previous relief measures taken by the government were only a temporary stopgap plan that failed to present a real solution to the problem," said GNP floor leader Hong Joon-pyo. "The conglomerates and business giants that greatly benefit from the rising exchange rate must distribute some of their gains." This strife is considered the first serious labor dispute faced by the Lee administration, as it is expected to further slow the nation's sluggish economy, which is already struggling with rising oil prices and the global economic downturn. In a similar event, truckers went on a massive walkout in 2003 which led to export losses worth $540 million and left export container shipments piled up at major ports. They finally reached an agreement with shipping firms to end their week-long strike. The Transport Ministry said drivers and shippers agreed to raise long-distance haulage rates by 19 percent and introduce legal standard shipping rates next year. "We really appreciate the container consignors for understanding the hardship of truckers stemming from the oil price hike and trying to settle the negotiation," the ministry said in a statement. Many cargo truckers have been suffering losses in recent months due to a surge in diesel prices. Those on strike mainly were self-employed truckers who have to bear the brunt of the fuel cost burden. Truckers have been demanding not only a pay increase but a reform of the multi-layered brokerage system, which they insisted has been denting their income. The government has been trying to soothe the growing complaints by offering various incentives to strikers. The Transport Ministry promised to spend 100 billion won to buy back trucking licenses and trucks to ease the supply glut of commercial trucks in the market. It also pledged to revamp the multi-layered brokerage system, which striking truckers say has been substantially cutting into their income. The state aid scheme includes subsidies to help drivers convert their trucks into gas-powered ones, which cost less to fuel than diesel-powered vehicles. The government also pressured shippers to make more concessions to settle the dispute early. The proactive move by bureaucrats helped truckers to come back to the wheel, observers said. As the strike came to an end, local manufacturers that have been substantially disrupted by the clogged transport are expected to normalize their operations, but the damage was done. Nearly 600 construction sites were hit by a shortage of materials and more than 60 projects were suspended. The threat of slowing economic growth is another blow to Korean President Lee Myung Bak, whose support plunged by more than half since he was elected in December. Anger at his decision to resume importing U.S. beef that triggered more than 80,000 street protesters in Seoul and strikes threaten his ability to push through the economic-growth agenda for which he campaigned. "It's bad news for the economy and the government," said Chun Chong-woo, an economist at SC First Bank Korea Ltd. in Seoul. "This political headache could hurt June's economic performance." Economic Outlook According to a recent report by Samsung Economic Research Institute (SERI), surging commodity prices, global financial market turmoil and the US economic slowdown have converged on the Korean economy entering 2008, erasing upward momentum. Record oil, grain and raw material prices caused the biggest jumps in consumer and producer prices in years during the first quarter. This created a deficit in the first-quarter current account and spurred weaker domestic demand. “We project consumer price growth to be at 3.9% in 2008, up from our original forecast of 3.3%. In particular, we will see price instability worsen through the third quarter with consumer prices predicted to rise to over 4% through that period. Meanwhile, the current account will see the first yearly deficit since the 1997 financial crisis. The deficit will likely reach $9.1 billion,” it noted. These factors will likely accelerate domestic demand contraction in the second half, as exports slow down due to global weakness, especially in the US , Korea's No.2 trade destination, where all-important consumers are caught between record energy prices, a credit crunch and a sinking housing market. Although global financial markets have stabilized, fundamental health remains fragile and will continue to weigh on all economies. Korean policymakers are facing the difficult task of boosting growth without fanning inflation. Considering that the economy will slow down faster than expected in the second half, an aggressive fiscal policy through a supplementary budget is needed, while addressing a flexible monetary policy that does not stimulate inflationary pressure. Foreign exchange rate policy should be towards downward stabilization of the won-dollar exchange rate given that the depreciation of the won triggers inflation. Also crucial is efforts to secure growth potential through deregulation and investment, the SERI report notes. The thinktank forecasts that exports should remain strong enough through the first half to temper an overall downturn. Double-digit growth in first-half exports is likely, thanks to increasing demand from natural resource-rich countries and the strengthening of the euro and yen. Thus, final first-half data will likely show only a moderate economic slowdown. “However, in the second half we expect to see exports decelerating to 10% growth due to the weakening of the decoupling effect (Asia's decoupling from the US economy) and continuing weakness in domestic demand. Numerous factors such as weakening household purchasing power and stock market volatility will exert a negative impact on domestic demand.” It also noted that the recovery phase of private consumption that began in 2007 waned in the first quarter of this year. Consumer price hikes (buffeted by record raw material prices), a weaker job market, and heavy selling in domestic stock markets (in the wake of uncertainties in global financial markets) eroded consumer sentiment. Conditions unfavorable to private consumption will likely continue for the time being. “Toward the end of the year, conditions should improve. Consumer price increases will likely abate, helped by more stable international raw material prices, while stock markets turn upwards. Employment conditions will improve as the Lee Myung-Bak administration's business-friendly economic policies, including loosened regulations and tax cuts, take effect,” it notes. Referring to facilities investment for this year, it notes that consumption will decelerate on higher consumer prices. A rise in the won-dollar exchange rate will lead to domestic demand-oriented companies' worsening profitability and an increase in the price of imported capital goods, exercising a constraint on facilities investment. Overseas orders, especially from resource-rich countries, are giving conventional manufacturing industries such as basic machinery and shipbuilding reason to expand facilities. In addition, IT sector may restart investment to fill the capacity gap caused by sluggish investment since the second half of last year. Construction investment is expected to increase at an annualized rate of 2.3%, led by more public works and non-residential building construction, with residential construction shrinking. The housing market is predicted to remain weak due to the large inventory of homes and apartments and the government real estate policy's stress on price stability. The investment increase in public construction for the second half will be driven by supplementary budget in preparation for a possible economic slowdown. Investment in non-residential construction is likely to accelerate into the second half, resulting from low vacancy rate in the wake of a recovery in domestic demand. New job creation is expected at 200,000 in the second half, slightly less than 205,000 in January-April. This means that economic slowdown is prompting people to delay their entry into labor market either voluntarily or non-voluntarily. In other words, the increasing number of economically inactive population is slowing the unemployment rate while limiting job creation. Nevertheless, as the number of regular workers increase relatively more than that of temporary and daily-based workers, the labor market will improve slightly. Service industries in the public and private sectors will lead job creation this year. They are relatively flexible in employment, meaning that they can enjoy a rise in the number of employed but be relatively unaffected by economic slowdown. In conclusion, it points out that although record oil and raw material prices are weighing down domestic demand, government policy should focus on boosting economic growth rather than anti-inflation measures. The expected stabilization of commodity prices in the second half will provide cover for growth-oriented steps. Expansionary fiscal policy should be adopted and the Bank of Korea should trim interest rates to help weather a likely downturn in the second half. “Quick stimulus should be through a supplementary budget that helps create jobs rather than tax cuts, which require a longer time to have an impact. The short-term step should also be augmented with measures to lift domestic demand on a longer term. Deregulation and tax cuts would encourage investments and job creation and the service sector awaits further government attention. Equally crucial is support for R&D and technical manpower to nurture next-generation growth engines,” the SERI report notes.