SOUTH KOREA'S OVERBURDENED CONSUMERS.

South Korea's consumer credit bubble burst late in 2002 and household spending has been in the doldrums since then. High-end spending has been particularly hard hit and it looks as though a recovery is not in the cards this year.

Local sales of South Korea's five leading auto makers were down by more than 20 percent year-on-year in recent months. The losses are likely to diminish late this year, but year-on-year sales of new cars will remain sluggish through at least the first half of 2005.

Demand for imported consumer goods has slipped over the past year, in part due to the more than 10 percent decline in the value of the national currency (the won) relative to the euro since August of 2003. On a more positive note, currency factors have boosted the cost competitiveness of Korean manufactured goods in foreign markets and contributed to double-digit growth in the export value of Korean finished goods so far this year.

Several factors have combined to erode household spending this year. Consumer price inflation recently rose to 3.5 percent and an inflationary wave resulting from recent oil price increases earlier in the year has not yet hit end consumers. The prospect of rising inflation recently drove the central bank to raise interest rates.

Given the heavy debt burden of the average Korean household, the uptick in interest rates will directly eat into disposable income. In addition, consumer price inflation will offset wage increases, resulting in no significant improvement in real household income this year.

Soft demand for residential real estate is putting downward pressure on home prices at a time when most families have put new home purchases on hold. That, in turn, is reducing real household wealth and consumer confidence. Internal demand for Korean goods and services should recover by mid-2005 as consumers whittle down their debt burden and confidence levels begin to rebound.

DEMOGRAPHIC EXPANSION POSES A JOB CREATION CHALLENGE The population growth rate for South Korea is slightly higher than the regional average, even though the birth rate of 12 per thousand inhabitants, is below the average of 13 per thousand for East Asia. Job creation has barely kept up with growth of the labor force in the past two years, and it is unlikely that the situation will improve significantly until well into 2005. Unemployment is running about 3.5 percent, and job-related concerns are undermining consumer confidence.

South KoreaAEs population is approaching 49 million people, which amounts to just under 4 percent of East AsiaAEs 1,289 million inhabitants. According to data released by the Population Reference Bureau (PRB), South Korea is going to have a population of 44.3 million people in 2050, or 8 percent less than in 2003. The PRB revealed that a hefty 79 percent of South KoreaAEs population lived in urban areas during 2003, and that the countryAEs population density was a comparatively high 1,251 people per square mile. By the year 2050, South KoreaAEs population density should drop to 1,151 people per square mile.

Another source of demographic data, the CIAAEs World Factbook, indicates that 20 percent of South KoreaAEs population was birthu14 years old in 2003, while 72 percent was 15u64 years old, and 8 percent of the populace was 65 years of age and over.

CIA statistics revealed that the countryAEs population growth rate was 0.62 percent in 2003 and the net migration rate was nil. According to the United Nations Population Division, in the year 2050, 17 percent of South KoreaAEs population will be birthu14 years old, while 50 percent will be aged 15u59, and 33 percent of the populace will be 60 years of age and over. South Korea's total population growth will drop to zero by 2030 and turn negative after that.