Economic Forecast of 2nd half of 2010 and its Influence on Korean Economy
2010/07/23 3 Comments
The recovery of world economy is still underachieving. Since late 2009, there were some positive signs of recovery; however bumpy road still lies ahead. It was the efforts from the governments to organizations like G20 that contributed to the hopeful numbers with aggressive governmental expenditure, easing financial regulation, boosting consumer sentiment, and also China by maintaining their growth vigorously to boost the global economy. This trend is expected to continue in 2010 as well. Though positive signs were shown, there are pros and cons on economic forecast around mid 2010. According to the recent publication from SERI (Samsung Economic Research Institute), Light and Shadow of Economic Forecast of 2nd half of 2010, there were both sides of positive and negative factors that could affect the global economy. Needless to say, THE Korean economy depends on these factors as well.
Those who support the view that the world economy shall bounce back argue that the economic growth can be secured by the following three factors: sustainable growth of China, continuance of the U.S. economic recovery, and international cooperation for global financial crisis. Firstly, China did not lose their steam for the growth despite of global financial crisis even though they are quite new in experiencing it. From the fear of chaotic inflation, Chinese government decided to raise interest rate and tighten their budget as well; however, it is not expected to halt the continuous pattern of growth any time soon, not only because solid export performance but the expansionary economic policy is expected to stay in place.
Secondly, the U.S. economy is expected to continue its recovery. Since the financial turmoil and the mortgage crisis, the United States began to recover from the rock bottom of the economic condition. According to the Bureau of Economic Analysis under the U.S. Department of Commerce, GDP has grown in previous three quarters respectively. Personal consumption expenditure apparently bounced back.
The U.S. economy is solely responsible for big chunk of 26.4%, 12.8% of the world’s GDP and import respectively; which is considered to be a powerhouse of world economy. Therefore, the recovery of the U.S. economy shall be continued without falling into a double dip recession in order to sustain the growth of world economy.
Lastly, the international effort for treating global financial crisis among countries is expect to minimize the cost derived from the crisis of specific region. For instance, the IMF and the EU together decided to support financially troubled Greece; which prevents further severe consequences to other countries. On the other hand, the world economic summit expansion from G7 to G20 is significant; newly industrialized, developed countries are expected to bring more suitable consensus and collaboration.
On the other hand, some are still skeptical of the world economy. They point out that the world economy is to be discouraged by the following factors: recession across the Euro zone, possible revisit of global credit crunch, and the pressure on exit planning resulting actual economy down behind.
First, it is possible that the recession could spread further around the Euro zone; starting with Greece, Portugal and Spain, who are in financial troubles. Those countries actually began tightening its budgets and decreased public spending while increasing tax revenues. This discourages consumers from their spending and evidently would lead deeper into the recession. As for Greece, they froze pensions, cut down civil service officers’ salaries, and imposed new taxes on a variety of goods to deal with their debt crisis.
Second factor is that it is possible to withstand another global credit crunch. The current financial crisis made European banks extremely weak on their financial soundness. According to the recent statistics, NPL ratio and reserve ratio for possible loan losses on European Banks look somewhat worried. While NPL ratio has been increased, reserve ratio for possible loan losses have decreased over years; which shows lesser capability to handle the escalating bad loans than before.
It is inevitable that banks should reduce the amount of credit as non-performing bad loan. However, it will cause a credit crunch; which means companies and individuals are able to receive less loans or no loans from banks. This credit crisis could either halt or worsen European economy as a whole. Furthermore, this could affect other countries as well. Because the banks will have no choice but to suspend their lending no matter how attractive the investments are in developing countries.
Lastly, there is a pressure to discuss exit plans. In the aftermath of Greek debt crisis, countries are reconsidering their stimulus programs to regain fiscal soundness of the government. Some countries already decided to increase tax rate or interest rate. Raising interest rate and taxes even before the economy is fully recovered could either suspend or worsen the economic situation further.
Since the Korean economy is interdependent among countries around the world, it is sensitive to any external factor and sudden change on economic climate. As an export-depended economy, the Korean economy is also vulnerable to changes on exchange rate. Either appreciation or depreciation of Korean Won (KRW) is not necessarily unfavorable to the Korean economy since it is more important that the currency remains stable. The economic recession from the Euro zone could be disadvantages to the export; however, increasing export to other countries, China, the United States, and Japan is expected to make up for losses from the Euro zone. At current stage, the Korean economy looks to be solid. In order to secure its sustainable growth, all things needs to be considered and closely monitored to be aware of what is going on around the world.