• Although most business cycle indicators are pointing economic downturn, business and consumer survey indices are now showing signs of a turn-around.

• Consumption indicators have been weak, but recently improved with a turn-around of the retail and wholesale indices and a rise in the consumer confidence index.
• Equipment investment indicators are falling, though at a slower pace compared to Q4 of 2000.
• The declining pace of construction investment has been mitigated since the 2nd half of 2000, and the recent movements in related indicators are suggesting moderate recovery.

• Despite continued surpluses in the current account, foreign reserves are not growing as capital account balance turns into deficits due to the repayment of foreign loans and trade credits.
• The terms of trade, which deteriorated significantly last year, is being stabilized in line with falls in oil prices.

Ⅱ. Economic Outlook

• Economic growth of the U.S. and Japan will slow to 1.52.0% and 1.0%, respectively, in 2001.
• Domestic financial market will be able to maintain stability thanks to continued progress in corporate restructuring.
• The current monetary conditions will not further deteriorate, while additional fiscal stimulus is not considered except for the current front-loading of expenditure.

• private consumption is expected to record a mere 3% increase along with economic slowdown and weakened purchasing power.
• Equipment investment is likely to decrease by around 4%, as the capacity utilization ratio falls and capital goods import prices rise, not to mention financial market instability.
• Construction investment is forecast to turn around to a positive growth of 23%, as demand for housing construction is partially recovering.

• Inflationary pressure on the demand side, however, will remain small, with little chance to rapidly expand in the near future.

Korean Economy Outlook (2001)

(Year to Year Ch0ange, Unit: %, $US 100 mil.)

Ⅲ. policy Recommendations

1. Assessment of the Current Economic Conditions

• Financial troubles of Hyundai Group, and the delayed restructuring of troubled firms, including Daewoo, have been the major sources of financial instability.

• Economic growth could fall below 4% in case of the hard-landing of the U.S. economy combined with increased volatility in international financial market.

• Investor confidence is a critical precondition for not only the stability of capital and foreign exchange markets, but also the potency of macroeconomic policy instruments.
• policy priority should be given to the swift resolution of financial troubles of those companies, particularly Hyundai subsidiaries, subject to the Fast Corporate bond Underwriting program.

2. policy Direction

• Real effective exchange rates are estimated to have depreciated by over 12% since September 2000 when economic downturn began.
• In light of this, currency stability needs to be secured by removing uncertainties surrounding not only economic restructuring but also macroeconomic policies.
• In order for financial market to function properly, widening interest rate spreads based on prudent practices of credit risk assessment need to be well respected by market agents.
• At the same time, credit guarantees by public funds need to be scaled down in tandem with market-driven corporate sector restructuring.

• Given this premise, the target of consolidated budget deficit of 0.1% of GDp seems to be appropriate.
• In particular, the scheduled government spending of 49.1 trillion won in Q2 (34.3 trillion won in Q2, 2000) is expected to bring about sizable boosting effects.

• Although the rate of unemployment will rise in line with economic downturn, it is expected to stay around the natural rate of unemployment which is estimated to be around 4%.

• Although Hyundai Engineering and Construction is now able to survive with planned debt-equity swap and recapitalization, it should improve its operational profitability substantially in order to ensure the long-term viability.
• For those companies subject to the Fast Corporate bond Underwriting program, the government and creditor banks should enforce strong restructuring measures, including employment and capacity adjustment and asset sell-outs, among others.

• In order to guard against the possible side effects of bank merges in terms of market competition, the sale of Seoul bank needs to be expedited while the managerial independence of the newly established financial holding company should be guaranteed.
• For better protection of investors rights, it is advised to set up a unified legal framework governing collective investment scheme including investment trust companies, securities investment companies, and bank trusts.