[NOTEBOOK]Market psychology in a recession

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[NOTEBOOK]Market psychology in a recession

When I had a chance recently to meet a veteran businessman, I became curious about what those in the front lines think of the economy. He responded to my question with another question: “The market is very sluggish, but what do you think will happen in the future?” I regretted having brought up the issue and changed the subject.
In fact, even specialists who consider themselves knowledgeable about the economy are puzzled at the latest economic indicators. A case in point is the monthly industrial activity report issued by the National Statistical Office. According to the August report, production increased but consumption and investment in facilities decreased.
This is an official report from the government statistics agency, and it takes more than economic expertise to figure out whether the data mean that the market is improving or worsening. It sounds like one of the old weather forecasts saying, “The cloudy sky will clear up, with a chance of rain.”
Between the lines, the August report says, “More products were made, but they were not sold, so companies could not expand manufacturing facilities or buy new equipment.”
In other words, companies were forced to operate their assembly lines because they couldn’t let the workers stay idle when they came to work every day, but sales decreased despite more goods on the market.
The result is an increase in inventories. Produced goods are stocked in a corner of the plant, waiting for demand that is not likely to come in the near future. The factory might be operating now, but it is not likely to remain in business for long.
Let bygones be bygones, and let’s talk about the future and where the market is headed. The same report also gave figures about the composite index of leading economic indicators, which is supposed to tell us of emerging trends in the market in the near future, about six months from now.
For three consecutive months, the index has been implying that the economy would get better.
So the economy is indeed getting better. Even the governor of the Bank of Korea said the economy has hit the bottom and will rebound by the end of the year.
Well, that does not sound very convincing, and distrust grows. I asked the businessman again, “The economic indicators seem to suggest that the economy will not go lower, so why do you find it so hard to do business?”
“Well, it’s more as if the mood is not set yet. Somehow, I am very insecure, and I am afraid to expand my business. Do you know what I mean?”
He couldn’t pinpoint why he felt anxious, but he didn’t want to take a risk and so decided to play it safe. Even when the global economy is on the rebound and interest rates here are at a historical low, investment remains sluggish.
Economic indicators cannot explain this strange phenomenon, and maybe the “mood” is really what is causing the sluggish market conditions. In the past, companies would jump at the chances to get bank loans and figure out how to spend the money after getting the loan first.
Now, they are reluctant even when banks are begging companies to borrow.
“It’s not like I do not want to invest because I don’t have enough money. I just don’t feel like it.”
This psychological uncertainty may be the real culprit for the decreasing investment and sluggish economy. Flip the coin over, and the economy would boom and investment would bloom if the right ambiance is set.
If businessmen were motivated to do business, the Korean economy would be out of this recession in no time. The solutions are simple. The government can just encourage our businessmen instead of drafting supplementary budgets or prescribing market stimulus packages. The new remedy doesn’t require money, and has no side effects of price rises.

* The writer is business news editor of the JoongAng Ilbo.

by Kim Jong-soo
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