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Economic Outlook for Second Half 2010

Economic Outlook for Second Half 2010

June 15, 2010

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The Korean economy has shown a strong recovery since the start of 2010. Economic growth edged up to 2.1% quarter-on-quarter during the first quarter after slowing to 0.2% in the preceding quarter. On a year-on-year basis, the economy grew 8.1%, marking the largest increase in seven years and three months.

The high growth was attributable to three factors: the robust Chinese economy, semiconductors and autos. The Chinese economy grew 11.9% in the first quarter of 2010, which contributed to the rise of Korean exports to China from 46% growth in the fourth quarter of 2009 to 61% growth in the first quarter of 2010. Meanwhile, the semiconductor industry benefited from global economic recovery, knock-on effects from Window 7 and spread of smart phones. The demand strained supply, pushing up the fixed price of DDR3 DRAM from US$1.94 in October 2009 to US$2.50 in March this year to US$2.69 in April. This in turn increased semiconductor exports from minus 5% in the third quarter of 2009, to 73% in the fourth quarter, to 121% in the first quarter of 2010. As for autos, domestic consumption was solid, thanks to a tax break for new-car buyers and launch of 2010 models. Externally, Toyota's massive recall increased Korea's car exports in the first quarter by 51% year-on-year.

With the sovereign debt crisis in Southern Europe grabbing the headlines, Korean and other financial markets that have been stable since mid-February entered May with much greater volatility. The fiscal crisis stemmed from Standard & Poor's downgrade of Greece's sovereign credit rating on April 27. Despite an IMF-EU package to backstop Greece's debt, financial markets remained anxious. The MSCI indices of developed and emerging economies fell nearly 10%, and major currencies against the US dollar have plunged with increasing preference for safer currencies. The KOSPI fell to the 1,600 level as foreign investors withdrew capital and the won/dollar exchange increased sharply. In just two days, May 6-7, the rate rose 39.90 won because of market fears stemming from Europe.

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