Reality Check: 2012 Outlook of Korean Economy and Financial Market

Update : According to the latest report from IMF, world economy may have to suffer more than estimated in early this year due to the fact that fiscal crisis among Euro countries never seemed to calm down in any time soon as well as ever long sluggish major economies. IMF revised their projection of world economy down to 3.5% from 4.0% in earlier this year. Subsequently, major economies expect to perform worse. Problematic Euro area is to post negative growth as low as -0.3% this year and even China will lose its growth steam eventually and its GDP expects to reach less than 9.0% per annum. Evidently Korean economy also cut its growth rate by 0.4% to 3.3% according to the recent report from OECD.

Based on consensus from economic forecasts and reports from economic research institutes, Korean economy expect to experience the hardship under lower than expected growth and inflation scare. Seemingly no-end-near to global recession deteriorate export and import balance further, which is essentially regarded as the core engine of Korean economic growth.  Also high inflation would discourage for consumers to cut back their spending as well. Therefore, it is about time to check how Korean economy will be shaping up as well as global economy in 2012 and to take a closer look at domestic financial market respectively.

Accordingly, global economy expects to continue its sluggishness this year. Major forecasts reported that world economy will grow as low as the level of last year or even lower from the latest data. For instance, IMF (International Monetary Fund) estimates overall economy expect to grow about 4.0% same as 2011. Meanwhile, OECD (Organization for Economic Co-operation and Development) foresee its forecast lower to 3.4% which down by 0.4% from last year’s (3.8%). Latest survey from World Bank even urged that global economy could grow 2.5% at most.

Considering the fact that ongoing recession and fiscal woes of U.S government and uncertain condition of financial difficulties among E.U. countries, it may not rule out that global economy will perform as expected since any contingent event easily lead to collapse another free fall of overall economic indicator under this fragile fundamental of world economic condition. Regardless of the fact above, global slowdown seems inevitable as overall demands have been diminished and consequentially new emerging economies including Korea and China expect to face lower growth of local economy because of the continuous decrease of export. To make matters worse, politics would not be able to either help to sustain or boost their economy soon enough. Series of political power shift, such as general and presidential election will be held over major countries during this year. As usual, any economic policy cannot be proceeded (or halt) until either incumbent or new political power settled.

As global economy is suffering from a long path of downturn, so does Korean economy. One of biggest export-oriented economy in Asian region expects to face a hardship in 2012 as global demands are to shrinking further under the recession and revalued local currency relative to US dollars. According to major economic research institutes and gov’t agencies estimate that domestic economy grows approximately 3.6% only this year. Compared to the actual figure in 2011(4.0%), it clearly the economic growth is weaken in every aspect.

Consumption remains as stagnant as last year. Based on SERI report, private consumption expects to stay or slightly less than 2011: 2.5%. Since 2010, the figure keeps sliding down in two consecutive years. Scared by inflation hike and uncertainty of domestic/international market, the consumer’s sentiment seems to be pessimistic. Investment in facilities and construction also do not anticipate meaningful increase any time soon. Peaked in 2010, facilities investment kept its increase in small margin and continues in 2012. After years of tough times in construction, investment in construction sectors are still struggling from the bottom.

Most of economic reports also unanimously agree that Korean Won(KRW) will be revalued over US dollars. Again, due to the financial difficulties in EU countries and worsening fiscal problem in US among advanced economies, capital expect to keep flowing into emerging economies, including Korea. Even though the currency is subject to change under the free floating system by external factors, mostly Korean Won expect to slowly appreciate along this year up to early 1,000 won per USD.

Korean financial markets are necessary to prepare possible volatilities triggered by two factors. According to the article from Forbes, Korean market can positive unless European collapses and serious conflict with North Korea. Since Europe is still under cloud with a haze of uncertainty, any significant news or development are subject to rattle the market in every way. After sudden death of the late leader, Jong-il Kim, his heir and son, Jong-un Kim, began to take over his power and legacy according to news. Learning from the history with N. Korea, they might try to commit any possible conflict or tension in order to consolidate their regime. The country had secluded itself from outside and unknown for internal activities. Therefore, it is quite an unpredictable and potentially dangerous. Other than that, overall financial market will modestly gained or stay as flat through this year.

Since IMF bailout, Korean economy and financial market became more open and exposed to global market. In some sense, it may lead one of the largest Asian markets to be more vulnerable or volatile to external circumstance or changes, vice versa. Nevertheless, Korean economy and financial market successfully found its own path to get through so far. Gov’t financial watchdogs  keep monitoring how the economy perform the way they planned and ready to implement any effective measure to prevent from any severe financial turmoil and collapse from either internal or external. It is undoubtedly true that global economy go through seemingly no-way-out of recession long haul; however, Korean economy expects to be resilient and take a good stance under financially sound fundamental. Of course, as long as we are steadfastly ready for rainy days.

 

Jin Mok Kim (jinmok.kim@gmail.com)

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