• While the overall pace of slowing in economic activity is modest, the softening in domestic demand is more evident than in the export, which might cause the employment condition to become tighter.

• The rise in import price (worsening of terms of trade, precisely) has inevitably acted to adversely affect GNI in some parts of economy.
  
  - The worsening of terms of trade appears in three types as: ? reduced firm's profit due to the increase in the cost of intermediate goods; ? decrease in household's real  income due to the increase in prices of final products; or ? reduced tax revenue in the case of tax cut by the government to buffer above impacts.

• The recent current account deficit can be understood as an inevitable consequence to buffer the negative impact of GNI shocks on domestic demand.
  
  - Considering the following identity: 「GNI = domestic demand expenditure + current account」, when Korea’s GNI decreases due to external shocks and domestic demand does not decrease as the same rate, then the current account should turn out to be a deficit (or, surplus will be reduced).
   
• Under such circumstances, the recent depreciation of the won will serve to turn current account towards a surplus after the second half of 2008.

• Under the circumstance where inflationary pressures from the demand side had gradually expanded last year, the price hike of oil and raw materials caused the CPI inflation to rise above the target range (3.0±0.5%).
   
• Not only that, the depreciation of the won this year has led to the overall increase in import prices (in won) and to pass-through to the core consumer prices, which heightens the possibility of the recent pace of inflation being continued for a while.

• It is expected that comparing with the US, the growth rates of other countries (in particular, developing countries) will face a moderate slowdown. The Korean economy is forecast to face limited scale of negative impacts, since it has consistently expanded its exports toward developing countries, like China.
   
• Along with that, the recent slowdown of global economy is expected to be driven by the contraction in residential investment and private consumption that have lower import-inducement coefficients, which suggests its impact on world trade volume and Korea’s exports is likely to be relatively low.
   
• In particular, due to the global depreciation of the US dollar, Korea’s export prices (in terms of the US dollar) has been on the rise. Thus, a two-digit growth rate of exports is likely to be continued.  

• It is expected that economic sentiment for both consumers and businesses will not be favorable due to the high inflation from the high oil price and a weak won, a softening in domestic demand, and tight employment conditions.
   
• However, as the recent continuing growth in exports mainly serves to support production growth in the overall economy, the fall in GDP growth rate is expected to show a relatively modest decline.
   
• Also, taking into consideration the restructuring process since financial crisis and the stabilized macroeconomic condition for the past several years, it is presumed that the Korean economy is unlikely to go through any sudden collapse even in the event of an unexpected impact later.  

• Complying with the medium-term inflation target range is a prerequisite condition in order to sustain macroeconomic stability by anchoring the expected inflation of economic agents.
  
  - When economic agents' expectation of inflation rise, this may trigger the price-wage spiral which could cause overall economic instability.
   
• Considering the fact that there seem to be signs of a moderate slowdown, not of hard landing, it is necessary to take actions to buffer some sluggishness in domestic demand.
   
• However, under the condition where external factors deteriorate terms of trade and result in contraction in GNI, it would be desirable to recognize a temporal shrink in domestic demand as an inevitable consequence and to accept it for the longer-term economic stability.
  
  - In a situation where GNI keeps decreasing, it is inevitable that a policy to buffer domestic demand slowdown will put pressure on current account, or that another policy to rapidly decrease current account deficit will place domestic demand under pressure.

• A policy direction that should be most focused on at this time includes to deregulate that could maximize the benefits from creativities in public sectors, to establish laws and rules fairly applicable to all economic agents, and to enhance the efficiency in public sector, including government-run companies.

• It is assumed that the US economy, affected by stagnation in housing market and its resulting instability in financial market, is expected to register below 1%. Likewise, global economic growth rate (based on IMF's outlook) is assumed to decline from the high-4% in 2007 to the high-3% in 2008.

• This means that the won will be depreciated by around 13 percent on average in 2008 in terms of REER.

• It is expected that after recording a mid-5% growth rate in the first half, the growth rate will decrease to a mid-4% in the second half.
   
• Private consumption is forecast to grow 3% level, lower than the GDP growth rate, which is due to inflation pressures from both high prices of raw materials and depreciation of the won, and worsening of employment conditions.
   
• Equipment investment is projected to register as low as 2% level, a sharp drop from 2007, due to the depreciated won and weak consumption,
   
• The construction investment is expected to record a slightly higher growth of a low-2% level in 2008, driven mainly by increasing orders from public sectors.

- As for exports (in dollar terms), economic slowdown in developed countries led the export volume reduced a little, comparing to 2007, but as the export unit price (dollar basis) rapidly rose due to a globally weak dollar, the growth rate of exports is forecast to register 18% level, up from 14.1% in 2007.

- Due to price hike of oil and raw materials, the imports (in dollar terms) are expected to grow by 23%, remarkably higher than 15.3% in 2007.

• Since travel account deficit is expected to be reduced due to the depreciation of the won, accounts of service·income·transfers are expected to record a deficit of $18 billion, dramatically down from $23.5 billion in 2007.

• The number of newly-hired employees is expected to fall, comparing to 282,000 in 2007. However, considering the recent increasing trend of economically non-active population, the unemployment rate is likely to remain  at the low-3% level.

• The rise in inflation is mainly driven by the effect of Won depreciation on the prices of imported-goods and industrial products, and the inflationary pressures from the robust domestic demand in last year.
  
  - Core inflation is forecast to accelerate to 3.5% in 2008 from 2.4% in 2007 .

2007p

2008

Yearly

1/4^p

2/4

3/4

4/4

Yearly

GDP

　Total Consumption
　　Private

　Gross Fixed Investment
　　Machi. and Equip.
　　Construction

　Total Exports(Quantity)
　　Goods

　Total Imports(Quantity)
　　Goods

5.0

4.7
4.5

4.0
7.6
1.2

12.1
12.0

11.9
10.9

5.7

3.6
3.5

0.9
1.7
-0.7

12.1
12.8

9.5
11.3

4.7

3.6
3.3

0.9
-0.2
1.2

9.4
10.2

7.7
8.9

4.6

3.3
2.6

4.0
4.9
3.2

11.1
12.1

12.7
13.4

4.1

3.1
2.5

4.0
3.6
4.0

5.0
6.0

3.9
4.0

4.8

3.4
3.0

2.5
2.4
2.2

9.2
10.1

8.3
9.2

Current Account

　Goods Trade Balance
　Exports(Value)
　　(%)
　Imports(Value)
　　(%)

　Service·Income·
　Current Transfers

60

294
3,790
(14.2)
3,496
(15.0)

-235 

-52

-12
1,029
(19.0)
1,041
(29.4)

-40 

-32

40
1,124
(21.0)
1,084
 (26.2)

-71

22

65
1,145
(22.0)
1,080
(28.3)

-43

56

85
1,190
(12.5)
1,105
(11.6)

-29

-6

177
4,488
(18.4)
4,310
(23.3)

-184

CPI Inflation
(Core inflation)

2.5

3.8
(3.0)

4.3
(3.5)

4.4
(3.8)

3.8
(3.7)

4.1
(3.5)

Unemployment Rate
(Seasonally adjusted)

3.2

3.4
(3.0)

3.1
(3.3)

3.0
(3.2)

3.0
(3.2)

3.2

•  It is thought that the larger than expected tax revenue (14.2 trillion won) for last year contributed to the overall austere fiscal policy (fiscal multiplier  recorded negative).

• Considering a softening in domestic demand this year, an expansionary fiscal policy seems adequate for the stabilization of the economy.
  - In particular, a cash surplus carried over from the previous (year's) account has leftover revenue of 4.9 trillion won, excluding tax allocation grants to local governments, the settlement of grants, and the repayment of national debts, which allows a room for carrying out expansionary fiscal policies such as tax cut.
   
• Also, in case of additional tax revenues like last year, it is thought that there will be a room for implementing expansionary fiscal policy, like additional tax cut.
  - For the past several years, growth rates of total revenue?expenditure have continued to be above the (nominal) GDP growth rate, gradually raising the relative fiscal proportion in national economy. Considering this, policy stance like tax cut might be a positive and appropriate action from the mid- and long-term perspective.

• The monetary policy faces difficulties due to recently increasing possibility of economic slowdown and the current inflation lingering above medium-term inflation target range (3.0±0.5%).
   
• In particular, if the cost-push inflation, though a temporary factor, goes in gear with factors in demand side and raise the inflationary expectation, this will likely put a considerable burden on macroeconomic stability in the medium term.
   
• In order to curb the inflation expectation, the economic agents' belief for the monetary authority's credibility for price stability needs to be established first. To that end, it is necessary to cautiously manage future monetary policies, paying a keen attention to the pace of inflation trend and domestic demand slowdown.

• Letting the foreign exchange rate flexibly absorb impacts from volatile  external conditions is essential to domestic macroeconomic stability through the monetary policy.

• There seems no high credit risk for short-term external debts which have been growing rapidly by the demand for foreign exchange hedging. But, there is a need to continue monitoring, considering the possibility that it could act as a temporary risk factor in the foreign exchange market.
   
• On the other hand, though the global financial market has experienced credit crunch causing the rise in the borrowing cost, it would be appropriate to restrain a direct provision of foreign exchange liquidity by using foreign reserves.
   
• In addition, consistent supervision needs to be continued and reinforced so that  growing loans to SMEs will not lead to credit risks of financial institutions.