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33 2.50 2.00 1.50 1.00 0.50 0.00 -0.50 -1.00 -1.50 source: bank of korea <graPH 1> Korea’s growTH raTes and ConTribuTing seCTors 2012 1Q 2013 1Q2Q 2Q3Q 3Q4Q private consumption construction investment equipment investment government expentiture inventory variation net exports Q-on-Q outlook by sector: exports/ Consumption/ equipment investment to see slow recovery, Construction investment to slowdown Korean exports are expected to show lim- ited growth. Following a 1.3 percent decrease last year and a slight improvement to 0.6 percent in the frst half of this year, exports grew 3 percent in the third quarter. Te mo- mentum is likely to continue, as world trade continues to expand and households in the recovering developed world spend more on durable goods. However, exports will be neg- atively afected by the decreasing won-dollar exchange rate driven by the current account surplus. Export growth, therefore, is expected to be limited to around 5 percent next year. Stable raw material prices and expanding exports are predicted to sustain trade sur- plus. But if things go as expected and import growth outpaces the growth of exports, the surplus is predicted to shrink substantially to 34 billion won Private consumption picked up in the third quarter this year, afer continuing to show a weak improvement of just 1 percent until the frst half of the year. Tis is seen to be the re- sult of increased purchasing power of house- holds and stable consumer prices staying at a 1 percent range. Consumption is expected to continue growing in 2014, as raw materi- al prices stabilize and real income increas- es. More consumption will also start taking place among low-income families who will beneft from expanded welfare budget. Fac- tors that discourage consumption are likely to include chronic household debt burden, low employment rate, and high cost of rent- ing. Consumption may start shrinking in the second half of next year as interest rates rise and many individuals struggle to pay of debt. Annual consumption is expected to increase only slightly in 2014. Te recovery of domestic demand highly depends on equipment investment. While equipment investment has been shrinking rapidly since 2012, this year also marked a decline by 8 percent due to delayed corporate investment³, reduced quantitative easing and unstable global conditions. By the end of the second half this year, investment sentiment is predicted to recover with the government’s investment activation measures and increase in exports and consumption. Equipment in- vestment is expected to show a relatively high growth rate next year due to the base efect from the previous two years’ poor perfor- mance. However, dampened investment sen- timent driven by rising interest rates is likely to place downward pressure on equipment investment. Afer yea rs of negative growth, construc- tion investment fnally turned positive at 5 percent in the frst half this year and 8 per- cent by the third quarter. Te momentum is expected to continue with the government’s active investment and more constructions. However, the positive growth will slow down due to Korea Land & Housing Corporation’s decision to reduce projects, fnancial difcul- ties of construction companies, and the gov- ernment’s plans to cut SOC investments. Te growth forecast for next year is likely to de- cline to 1 percent, from this year’s 6 percent. financial Market: interest rates and exchange rates expected to increase into the H2 due to us exit strategy Korea’s interest rate began increasing afer the Federal Reserve announced in May that