REAL GROSS DOMESTIC PRODUCT

Real GDP grew by 13 percent year-on-year in the fourth quarter of 1999, bringing the growth rate for the whole year to 10.7 percent. This was the highest real GDP growth rate since 1987. Looking at the GDP growth in terms of economic activity, agriculture, forestry, and fishing production increased by 2.7 percent year-on-year in the fourth quarter of 1999. GDP growth in terms of expenditure had private consumption registering a 10.3 percent increase due to higher household spending, especially on durable goods, such as cars, mobile phones, personal computers, and furniture.

During the second quarter of 2000, GDP growth was slightly down, at 9.6 percent compared with the previous quarter. However, it is projected that real GDP will grow by 8.5 percent with a trade surplus of 10 billion won this year. Recovery in domestic consumption and booming exports along with inventory build-up are behind the optimistic projection for GDP growth.

INFLATION

In September, consumer prices rose by 1.5 percent, and producer prices also rose, by 0.6 percent. The prices of agriculture, livestock, and marine products showed high increases in September due to typhoons. Petroleum, chemical and plastic products led the increase in industrial product prices due to the rise in international crude oil prices. Housing prices in February continued to rise following the trend of the previous month, reflecting seasonal factors.

Core inflation, which is calculated by removing the prices of petroleum fractions and agricultural products except cereals from the consumer price index (CPI), rose by 0.7 percent in September, which was the highest increase since the 1.0 percent recorded in March 1998.

High oil prices, combined with the speedy economic recovery and wage hike demands by unions will further add to the inflationary pressure. The central bank plans to keep inflation within the 1.5 percent to 3.5 percent range in 2000.

EMPLOYMENT

In August 2000, the population over the age of 15 increased by 1.0 percent (or 374,000 persons) to 36,195,000 persons, and the economically active population increased by 1.4 percent (or 304,000 persons) to 22,071,000 persons compared to the same month last year. The number of jobless fell to 0.82 million from 1.24 million a year earlier. The unemployment rate fell to 3.7 percent, slightly higher than the previous month¡¯s level.

The unemployment rate is expected to moderate in the coming months, as the demand for consumer goods and a pick-up in construction activity continue in line with the sustained economic recovery. However, the structure of new employment is different from that of the previous period, with more and more people working as temporary employees, and being employed for fewer hours.

TRADE BALANCE

Imports, on a customs clearance basis, did not change during September from the previous month¡¯s level of US$13.4 billion. Meanwhile, exports by Korean companies amounted to US$15 billion. As a result, the trade surplus was US$1.6 billion, which is slightly larger than the US$1.5 billion of the previous month.

In terms of commodity groups in July, the high growth rates continued for exports of information and communication equipment (102.7 percent), passenger cars (5.3 percent), and chemicals and chemical products (24.6 percent). By export destination during July, exports to both industrialized economies (29.3 percent) and developing economies (17.3 percent) increased notably. Meanwhile, imports of raw materials increased by more than 42.2 percent, as a result of higher oil prices. The increasing demand for telecommunications and electronics products, including personal computers, has also added to the import bill by necessitating the increased importation of foreign-made parts and components. Over the course of the next few months, it is anticipated that the increase in imports will slow down as a result of stabilizing oil prices.

TOTAL EXTERNAL LIABILITIES

As of the end of July, Korea¡¯s total external liabilities amounted to US$142.1 billion, up by US$1.1 billion from the previous month. This increase was attributed to a greater number of trade credits being linked to economic recovery and the increased borrowing of domestic branches of foreign banks from their headquarters. The share of short-term external liabilities to total external liabilities was 33.6 percent.

Korea¡¯s total external credit in July increased by US$1.2 billion to US$162.8 billion while total net credit increased by US$0.1 billion from the previous month to US$20.7 billion.

EXCHANGE RATE

The won gained approximately 3.3 percent in value, year-on-year, against the US dollar in August. The won broke through the 1,200 won/US$ level in November last year and this upward trend continued through the first quarter of 2000. The dollar traded at 1,131 won in January, 1,128 won in February and 1,117 won in March; and averaged at 1,109 won per dollar in January to August 2000. The rise in the won has been caused by the huge inflow of foreign investment funds, which amounted to US$3.5 billion during the first two months of 2000, equal to 65 percent of last year¡¯s total net inflow.

FISCAL POLICY

The budget deficit in year 2000 is expected to amount to some 2.0 percent of GDP. To achieve a balanced budget by the year 2003, however, the government will have to operate on the basis of a tight fiscal policy, and the national budget for next year will be raised by just 0.6 trillion won from that of this year to a total of 10 trillion won (US$8.8 billion). This would bring the budget growth rate down to 6 percent, or 1 to 2 percentage points lower than expected. As less income from the sell-off of state-run enterprises is expected, the government will seek to improve the efficiency of fiscal expenditures by rearranging its public investment priorities. At the same time, the government will secure stable revenue sources by implementing tax measures on illegal and under-reported incomes, and by reducing tax exemptions where the government deems it necessary.

MONETARY POLICY

The central bank will implement a flexible monetary policy to keep the core inflation rate within the 1.5 percent to 3.5 percent range this year; interest rates will remain in single digit territory. For the first quarter of this year, consumer prices and core inflation rose by 1.5 percent and 0.8 percent, respectively, which was well within the targeted range. In the financial markets, while overall liquidity has increased significantly, the concentration of funds at the short-term end of the market has persisted. Despite ample liquidity, however, the recent uncertainties related to the ailing investment trust companies (ITCs) remain as latent factors serving to destabilize the financial markets. Therefore, it is essential to establish a clear-cut plan for the restructuring of the troubled ITCs as soon as possible. Reflecting the financial sector circumstances, the Monetary Policy Committee of the Bank of Korea has decided that the overnight call rate would be maintained near its current level (5 percent) in May.

MEDIUM-TERM OUTLOOK

After the onset of the financial crisis, Korea suffered a serious economic downturn. However, the Korean government, on the basis of the IMF program, implemented drastic reforms to correct the structural weaknesses inherent in its economy. The economic restructuring was carried out in the corporate, financial and labor sectors in order to promote transparency, efficiency and flexibility.

Starting 1999, the Korean economy has shown a trend of rapid recovery. The growth rate, after falling by -5.8 percent in 1998, was up 10.7 percent in 1999 and 9.6 percent in the second quarter of this year. The high growth in the second quarter can be best explained by robust growth of domestic demand and exports. Corporate investments shot up by 41.3 percent year-on-year during this period compared with a 38 percent gain in 1999, due to active investment in machinery, ships, railways, car and automobiles. Exports of goods and services surged 22.9 percent year-on-year on strong overseas demand for computers, semiconductors and communications equipment. Imports of goods and services increased by just 19.8 percent, lower than the 28.3 percent rise recorded in the previous year. Private consumption rose, by 9.0 percent year-on-year compared with a 10.3 percent gain for the same period in the previous year, and government expenditures edged up 0.5 percent year-on-year versus a 1.7 percent fall the year before.

The real GDP growth in 2000 is likely to be as high as 8.5 percent, considering the rapid growth of domestic demand, such as private consumption and equipment investment. Private consumption is expected to experience a 7.6 percent growth in 2000 in tandem with an increase in real income and an expected decline in unemployment. Equipment investment, as a percentage of GDP, will rise to the pre-crisis level as the ongoing and strong investment expansion will continue through 2000, while construction investment is expected to revert to a positive growth trend in the second half of 2000 given the conventional time lag between construction orders and actual investment. The current account surplus is likely to shrink to approximately US$10 billion in 2000, down from US$25 billion in 1999, in line with the sharp rise in import demand resulting from the rapid expansion of domestic demand. The contributions to price stability of the deflationary GDP-gap, currency appreciation, and relatively stable wage growth are likely to decline in the future.

KOREA: OVERALL ECONOMIC PERFORMANCE