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A Rosy Future Ahead?
Korea’s economy is expected to grow by about 4% while the world economy may fall into a double dip recession
A Rosy Future Ahead?
  • By matthew
  • November 15, 2009, 00:00
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THE world economy is expected to grow by about 3% and Korea’s economy by about 4% next year. However, there are concerns that the world economy may fall into a double dip recession.

The recent economic growth prospects for 2010 by the International Monetary Fund (IMF) increased from the original forecast of 2.5% to 3.1%. The IMF stated that the estimated loss of financial companies from the global financial crisis should be reduced. It expected that the loss of financial companies between 2007 and 2010 would fall to 3.4 trillion dollars, a decrease of 600 billion dollars from the original estimation. The IMF’s evaluation includes the opinion that unprecedented global policy coordination and the symptoms of recovery of the object economy have significantly reduced risk in the international financial system.

The IMF noted that the risks borne by financial companies are still high and that banks must reinforce their capital and improve profit structure to escape from governmental relief loans. This is a warning that the finance which put the world’s economy at stake still bears risks. In addition, the IMF noted the risk factor of still depressed assets markets in the USA and Europe.

Professor Paul Krugman from Princeton University, the Nobel economics laureate in 2008 took part in the World Knowledge Forum sponsored by the Maeil Business Newspaper and warned that the current economic recovery might be an optical illusion. He said, “The recent improvement of the global economy mainly relied on the global inventory adjustment. When the inventory adjustment to fill the largely reduced inventory has been completed with a lower intensity of reflationary measures, the scenario of a double dip will be a substantial possibility.” According to Professor Krugman, even if a double dip occurs, growth will remain stagnant rather than falling into serious decline. He further stated that, “The current global economy should be under low inflation to the extent of falling on the verge of deflation and the surplus supply of companies would be consistent,” suggesting against retrenchment policies at this point of time.

He evaluated that Korea as a durable goods exporter was greatly shocked at the earlier stage of the global crisis, but that exports began to revive in the process of global inventory adjustment. However, he still warned that no one could assume the continued process of economic recovery. In his opinion, Korea’s economy is not as healthy as it looks now while it may not be as bad as that of the recent past.

The professor noted that the world economy and Korea’s still maintained insecure symptoms. Some experts are also concerned that Korea will experience a double dip recession in the latter half of 2010. While the government maintains that the possibility is extremely low, it will be necessary to attend to unfavorable factors, such as the more than 700 trillion won of household debt, slow corporate restructuring, the drastic rise in raw material prices, and straggling global risk factors.

It is still true that Korea’s economy is improving in the midst of the global financial crunch. While various economy research agencies produce different opinions, an approximate growth rate of 4% in 2010 is prevailing. The current account is expected to significantly decrease due to the effects of lower won-dollar exchange rates, expected to remain at around 1,100 Won, and increased oil prices compared to this year. Consumer prices are expected to increase by 3% and the price of oil to between 75~85 dollars per barrel.

The Samsung Economic Research Institute (SERI) expects that Korea’s economy will grow by 3.9% in 2010 and that national per capita income will reach 20,000 dollars with the revived domestic demand and exports. The SERI forecast that the weak dollar and the current account surplus will stabilize the won-dollar exchange rate downward to 1,130 won and that the current account will reach 15.9 billion dollars, about a half of that this year.

It also predicted that the oil price next year would increase by 20 dollars per barrel, reaching 83 dollars, but the falling exchange rate will maintain consumer prices to the annual average of 3%. The unemployment rate will be about 3.5%, a small decrease from this year, while investment in facilities will overcome the serious downturn and grow by 8.2% compared to this year.

The LG Economic Research Institute (LGERI) forecast a 4.2% growth. The LGERI expects the global economic recovery to facilitate exports, which will increase Korea’s growth rate. The real gross domestic product (GDP) in the second quarter of 2010 will recover to the level it was in the third quarter of 2008, right before the bankruptcy of Lehman Brothers. Exports as a vehicle for growth will increase from -14.8% in 2009 to 15% in 2010. Imports will increase by 23.7% and the current account surplus will be greatly reduced from 36.3 billion dollars this year to 9.7 billion dollars.

In addition, the institute predicts that private spending should recover from -1.4% this year to 3.7% and that investment in plants and equipment will increase by 8.1%. The won-dollar exchange rate will fall from 1,208 won in the latter half of 2009 to 1,140 won next year. Consumer price increase rate will be 2.7% and the unemployment rate will reach 3.4%.

The Hyundai Research Institute expects this year’s growth rate to be -1.0%, an increase of 1.2% from its previous estimation, and forecast growth in 2010 to be around 3.9%. Furthermore, it predicts private spending will increase by 2.9% and investment in plants and facilities by 7.5%, along with a 10.1% increase in exports and a 16% increase in imports. The unemployment rate will be 3.4%. The won-dollar exchange rate will be around 1,150 won, with a 3% increase in consumer prices and the price of oil increasing to 85 dollars per barrel.

The Korea Economic Research Institute (KERI) assumed a rather lower growth rate for next year. It forecast that the effects of finance and exchange rates will be weakened during the first half of 2010 and that growth will be slow, maintaining at around 3.2% throughout the year. The KERI also expected the current account surplus to drop from 30.4 billion dollars this year to 13 billion dollars due to the fallen won-dollar exchange rate and increased oil prices. Furthermore, it expects the consumer price increase to be more salient, with increased prices of oil and raw materials and the fallen exchange rate enabling us to expect a stable growth of about 3%. The won-dollar exchange rate will be maintained at around 1,100 won.

However, foreign credit assessors, financial institutions, and international organizations have given rather higher predictions for Korea’s economic growth. They expect Korea’s growth rate in 2010 to be 4.3% on average, which is higher than the 3.8 and 4%, forecast by Korean agencies and the Korean government, respectively. Credit Suisse Group predicted a 6% increase, followed by 5% by Nomura, Barclays, and Morgan Stanley, 4.6% by HSBC, and 4% by S&P.

Contrary to these rosy forecasts, some believe the Korean economy will fall into a double dip after reaching a certain level of economic recovery. The rationale for this is based on the shock from a possible global economic falter and the necessary exit strategy against the decreased effects of treasury loans and investments. A government spokesperson replied to this concern by mentioning that Korea might be influenced by a possible slowdown of the overseas economy but that this would not necessitate the forecast of a double dip recession.

The biggest task after the global economic crisis is employment. While countries are applying stimulus policies with an extensive amount of investment, employment numbers are still deteriorating. Growth without employment continues, placing job creation as the gravest task. The unemployment rate in the USA is 9.8%, 8.2% in Germany, 7.9% in the UK, 5.8% in Australia, 5.5% in Japan, and 3.7% in Korea.

At the recent General Assembly meeting of the IMF, Dominique Strauss-Kahn, the IMF Managing Director, said that it would take 8-12 months for the unemployment rates of various countries to improve, suggesting that this is the key to the recovery of the world economy. The USA recorded an unemployment rate of 9.8% in September 2009, its highest in the last 26 years, and leading President Obama to order all necessary policies to increase jobs. Japan meanwhile is to establish a permanent governmental organization dedicated to employment.

Korea is also faced with the urgent problem of unemployment. The number of unemployed increased by 141,000 in the last year. Unemployment tends to be prolonged once it falls backward, which is a feature differentiated from the growth rate. Based on the prospects of institutions specializing in the economy, the employment market will recover along with the economic revival next year, which however is countered by other more negative opinions. Job creation based on increased investment is expected to be the key to the solution.