[Viewpoint]Economic crystal ball gazing

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[Viewpoint]Economic crystal ball gazing

There is much debate still raging about the economic outlook for next year. The government still maintains its forecast of a 4 percent growth rate, but the predictions of private economic think tanks differ, from minus 3 percent to a 3 percent growth rate, some in the completely opposite direction. This means that nobody truly knows how the Korean economy will fare next year.

Amid such contradictory predictions, companies are having trouble establishing their business plans for the coming year, although the year is rapidly approaching its end. If the opinions of the institutes with expertise in economic forecasting differ from each other like this, it seems only natural that private companies have no idea what to expect from the economy either. This is not limited to businesses. Everybody feels the same, whether they are market merchants or housewives. It seems the economy is really heading downhill, but people have no way of knowing how bad it will be or how long it will last.

There is one easy way to predict the future course of the economy in such a situation: by drawing up two extreme scenarios. One is the best-case scenario in which everything turns out well, and the other is the worst-case scenario in which the economy turns to custard.

If we compare the actual situation with these two scenarios, we can see the reality more clearly, because the future economic situation will be somewhere in between the two extremes.

The economy probably will not be as good as the best-case scenario, but it will be better than the worst-case scenario. People with a conservative mind can prepare themselves for the worst-case scenario, and those who can afford to take a little risk can make plans assuming that the future will be closer to the best-case scenario.

Let’s take a look at the best-case scenario. This would be the case if the financial instability in the United States, the source of the crisis, disappears completely and the international credit crunch is resolved in a short time. In addition, if the pump-priming policies of each country produce satisfactory effects at once and the international economy recovers early enough, it would make things even better.

If tight international financing is relieved as hoped and the financial markets start to operate normally, the lack of foreign exchange will be resolved and exchange rates will quickly stabilize. Then the revival of the actual economy will be achieved earlier than expected, exports will increase again and domestic consumption will gradually start to rise, too.

Domestically, the instability of financial companies caused by short-term overseas loans would be relieved and supply of funds to businesses will be normalized at an early stage, allowing the country to overcome economic recession in a short time.

If we prevent insolvency in the real economy from infecting the financial sector by quickly removing corporate weaknesses through bold restructuring, the Korean economy will be able to revive and become stronger than ever.

The worst-case scenario is the complete opposite of the best-case scenario. This would be the case if the financial instability in the U.S. is not cured and the international credit crunch is not resolved for a long time or even worsen as new insolvencies surface.

The efforts of governments to revive the economy would make slow progress, and if economic recession accelerates, the international economy will fall into a bottomless pit. The grave situation caused by the lack of foreign exchange in domestic banks would get worse and exchange rates would skyrocket with the decline in foreign exchange holdings.

Decreased international demand would lead to a rapid decrease in our exports and, making things worse, domestic consumption would shrink, too. More companies would go bankrupt and insolvency in the financial sector would expand.

As a result, the credit crunch would get more serious and healthy companies would find themselves at the brink of bankruptcy. The number of unemployed will increase, and the rate of household bankruptcies will also rise. Then, we would not be able to get out of the long tunnel of economic recession for a long time, and all the people would suffer a long time from severe hardship.

Now for the moment of truth: Which scenario is closer to the future of the Korean economy? The answer depends on two factors - prediction and choice. We can only guess which way the financial instability of the United States and international economic recession will turn.

However, relieving the domestic credit crunch and restructuring businesses quickly is a choice we can make. If we make the right choice, there is hope for revival by around spring next year.

And if we don’t make that choice? Keep the second scenario in mind.

*The writer is an editorial writer of the JoongAng Ilbo.

by Kim Jong-soo

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