SOUTH KOREA LOSING UPWARD MOMENTUM.

The upsurge in export sales experienced by South Korea during the latter half of 2002 and early this year is losing upward momentum. Over the past year, firm internal demand for Korean goods and services served as a buffer against the global economic downturn, but that will not be the case for the remainder of this year.

Internal sales of high-end durables slipped during the first half of this year, with double-digit losses in car sales registered during the second quarter. With unemployment edging upward from 3 percent, consumer confidence is slipping. As a result, growth in household demand for durable goods will be weak, holding in the range of 1 to 3 percent into the fourth quarter.

Household expenditure on non-durable and semi-durable goods will be rather lifeless for the remainder of 2003, with year-on-year growth of 2.5 percent or less. Demographic factors will work against demand in these product categories. The average Korean household is moving beyond the prime consumption years and the Population Reference Bureau projects that the population will grow only 3 percent from 2002 through 2050.

Several factors weigh in favor of a rebound in internal consumption near the end of 2003 or in the first quarter of 2004. First, the prime interest rate is at a historic low and retailers are in a position to offer more attractive financing terms than seen in recent years. Inflation should hold at 3 percent or less during the second half of the year, paving the way for modest growth in disposable income. The 10 percent increase in the value of the national currency (the won) relative to the US dollar is making imported goods and services increasingly cost competitive and that should contribute to growth in sales of imported durables approaching 5 percent through the remainder of this year.

Strengthening of the won is undermining the competitiveness of Korean finished goods. Korean export goods were harder hit by the SARS epidemic than those of Southeast Asian nations because Korea exports a higher ratio of finished consumer goods. SARS-affected export markets account for 70 percent of Koreas export growth since 2000.

Faced with the prospect of slack sales both at home and abroad, Korean industry is likely to cut back on capital expenditure through the remainder of 2003. Modest year-on-year growth in production equipment orders should not exceed 4 percent over the next few months and intermittent year-on-year losses will be noted.

Plant expansion projects will be put on hold and that will undermine demand for fixtures and construction materials. Orders for plant fixtures should remain in a no-growth pattern into the fourth quarter of this year. Sales of construction materials should fare better, with growth in excess of 2 percent year-on-year thanks to increased government infrastructure spending.