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Exit Strategies and Economic Recovery
Exit Strategies and Economic Recovery
  • By matthew
  • November 15, 2009, 17:35
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During the third quarter of 2009, the Korean economy appears to have yielded a fairly good result. As its gross domestic product (GDP) grew 2.9 percent year-on-year, it is projected to achieve an annual 10 percent growth rate. The forecast for achieving such a performance depends on the nation’s outlook for good fourth-quarter earning reports. By the third quarter of 2010, the Korean economy is forecast to near the production level it was before the economic crisis. This is a remarkable bounce back in comparison to the global economy as a whole.

There seem to be many reasons for this speedy recovery. One reason is that Korea, which encountered the financial crisis in 2008, adopted effective strategies to boost the economy in the early stages of the economic difficulty. The government took a series of drastic steps to revitalize the stagnant economy with extra spending in the first half of this year. In addition, other factors, including a favorable exchange rate, low oil prices and robust growth in the Chinese economy, are believed to have contributed to the result.

Though the Korean economy is showing a sign of recovery, the situation is not as rosy as it appears. What we should keep in mind is excessive optimism. The government’s fiscal policy is destined to lose its effects as time passes. Two consecutive quarters of recovery cannot lead to predictions of the future. The contribution of net exports to growth in third-quarter earnings was negative. And it is highly possible that the predicted improvement of the won value will have a negative effect on the contribution of net exports to growth. And if the world economy slows down once again or global oil prices rise sharply, the contribution of net exports to growth will be further weakened. In addition, the government cannot continue to spend at the same rate it has been. Therefore, spending will inevitably lose its effect.

In conclusion, some economic factors behind the current distinguished growth of Korean economy will gradually disappear, including a sharp depreciation of the won, proactive economic stimulus measures and low oil prices. When this happens, the national economy is likely to decline significantly. Thus, if the government rushes to its exit strategies, such as increasing interest rates based on third-quarter earnings, it could become a real burden to economic recovery.