SOUTH KOREAN CONSUMPTION RETREATS.

At the outset of 2003, it appeared that South Korea was poised for another year of healthy growth in household consumption, but a number of unexpected negatives caused consumers to retreat during the first half of the year. Consumer confidence is not likely to achieve a sustainable recovery until tensions on the Korean peninsula diminish and the global economic climate improves.

Retail sales dropped off precipitously during the first quarter of this year and less so during the second quarter. Sales should rebound by the fourth quarter with gains of 2 to 4 percent year-on-year but that may not be enough to offset losses during the first half. As consumers cut back on high-end spending, department stores registered year-on-year sales losses of 5 to 10 percent. Discount stores suffered less, with sales dropping off in the range of 3 to 5 percent.

Discount store sales should recover faster than those in department stores, showing year-on-year gains in the range of 3 to 5 percent during the fourth quarter of 2003. Department stores should experience minimal sales growth through the remainder of this year.

Household expenditure on non-durables should remain rather stable with year-on-year growth of less than 2 percent prevailing through the latter half of 2003. Slow demographic growth will limit sales expansion for non-durables for decades to come.

The bright spot in Korean private sector investment this year will be domestic capital investment. A survey of industrial leaders recently conducted by the Korean Development Bank showed that investment on production equipment will rise 15.5 percent this year. Growth will be strongest in the automotive and information technology sectors.

Investment in facilities expansion will increase at a slower pace, with gains this year unlikely to exceed 5 percent. The construction industry will feel the squeeze as both industry and households cut back on new projects. As a result, sales of construction materials and equipment should remain sluggish until 2004.

SLOW GROWTH OF THE CONSUMER BASE WILL IMPACT DEMAND The population growth rate for South Korea is very similar to the regional average and its birth rate of 13 per thousand inhabitants is equal to the East Asian average. Job creation has easily kept up with the relatively slow pace of the labor force growth in recent years, and should continue to do so through the remainder of 2003. Unemployment of about 3 percent is not high enough to put downward pressure on consumer confidence.

Koreas population reached 49 million people during 2002, which amounted to just over 3 percent of East Asias 1,512 million inhabitants. According to data released by the Population Reference Bureau (PRB), Koreas population will reach 51 million people in 2025, or 4 percent more than the level in 2002. Also, according to that source, Korea is going to have a population of 50 million people in 2050, or 3 percent more than in 2002.

The PRB revealed that a hefty 79 percent of Koreas population lived in urban areas during 2002, and that the countrys population density is a comparatively high 1,262 people per square mile. By the year 2050, Koreas population density should reach 1,300 people per square mile.

Another source of demographic data, the CIAs World Factbook, indicates that 21 percent of Koreas population was birth-14 years old in 2002, while 71 percent was 15-64 years old, and 8 percent of the populace was 65 years of age and over.

CIA statistics revealed that the population growth rate is 0.85 percent and the net migration rate is nil. According to the United Nations Population Division, in the year 2050, 17 percent of Koreas population will be birth-14 years old, while 50 percent will be aged 15-59, and 33 percent of the populace will be 60 years of age and over.