Reason for caution

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Reason for caution

There is a silver lining in recent economic data on the domestic economy. Korea is expected to rack up its largest trade surplus ever to the tune of $4 billion this month. The news gave a quick boost to sentiment in the markets, sending the won to multi-month highs against the yen and multi-week highs against the United States dollar. This budding sense of optimism has also been fed by signs that consumer confidence is returning in the U.S. The consumer sentiment index for March and consumer expectations for the coming six months edged up, raising hopes that confidence in the world’s largest market may be improving. Last week, U.S. stocks were at their best, giving the impression that the worst may finally be over.

While it is true that a number of economic indicators are improving, it would be a stretch to say that a full-fledged recovery is around the corner. The better-than-expected trade performance is largely due to the steep decline in the local currency. Last year, the won lost more than 50 percent of its value against the dollar. It is no wonder, then, that exports increased and imports declined. Crude oil imports that reached $7.5 billion per month in the first half of last year were cut by more than half to $3.7 billion this year thanks to a global drop in oil prices. Oil imports alone added a $3.8 billion surplus to the country’s trade balance. As LG Economics CEO Nam Yong said in a recent speech, “We can’t afford to hallucinate about the exchange rate.”

It is premature to say the U.S. economy will avoid slipping into a slowdown. Mounting job losses and the bursting of the real estate bubble have yet to produce cataclysmic consequences. But without job security, it will be difficult to recover consumer confidence. If property prices don’t improve, the U.S. financial industry will hit its nadir, due to insolvency of mortgage-backed assets. We were fooled once by a fleeting revival after the government poured billions into cleaning up the banking sector in the late 1990s.

At this stage, we should be neither too optimistic nor too pessimistic. The cynics have already overemphasized our economic weaknesses, fueling fears of a crisis. Such discouragement could precipitate a highly contagious self-fulfilling prophecy. But rash optimism is equally as dangerous. Improvements in certain economic indicators and signs that the economy is shrugging off its downward spiral provide some comfort, but we need the assurance of real numbers - production, consumption, employment and investment - to truly regain confidence. As we pass through the tunnel of economic hardship, we may see illusory exit signs. But we could get into even more trouble if we let our guard down too soon and get off at the wrong exit.
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