[Viewpoint] Let’s not get ahead of ourselves

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[Viewpoint] Let’s not get ahead of ourselves

The Korean economy appears to have yielded fairly good results during the third quarter of 2009. As its gross domestic product (GDP) grew at a 2.9 percent annualized rate compared to the second quarter, it is projected to achieve an annual 10 percent growth rate. The likelihood of achieving such a rate depends on the nation’s much-anticipated fourth-quarter earning reports.

In contrast to world economy as a whole, by the third quarter of 2010 the Korean economy will begin to approach production levels seen before the economic crisis. This represents a remarkable bounce back.

Why is the Korean economy back on the road to recovery so much faster than many others?

One reason is clear. Korea, which encountered the severe economic crisis in the fourth quarter of 2008, adopted effective strategies to boost the economy in the early stages of the economic slump.

The Government took some drastic steps to revitalize the ailing economy with extra spending in the first half of this year, which has had a gradual ripple effect in the private sector by, for instance, spurring consumption.

Additionally, other factors are expected to play a role down the line, including a favorable exchange rate, low oil prices and robust growth in the Chinese economy.

But we need to keep up our guard. What we should fear most is excessive optimism. The government’s fiscal policy is destined to lose its effects with the passage of time. People who have sky-high expectations due to two consecutive quarters of recovery could find themselves disappointed.

In general, optimistic expectations facilitate the swift expansion of private consumption and bring us one step closer to economic recovery. However, if people become disappointed should the real economy fall short of their expectations, hope and optimism may turn into pessimism.

Considering that it is difficult to find concrete examples of achieving sustained economic recovery after past major economic downturns - such as the Great Depression, the first and second oil shocks, and the prolonged Japanese recession - there is the possibility that expectations of an easy Korean comeback will fall short.

Though we are seeing encouraging signs of economic recovery in the Korean economy, the situation is not as easy as it seems.

The contribution of net exports to growth in third-quarter earnings was a negative figure. And there is a high possibility that the predicted improvement of the value of the won will have a negative effect on the contribution of net exports to growth. This has served as the leading engine of growth for our economy since the fourth quarter of 2008, when we fell into a full-fledged crisis.

In particular, the won may increase against the yen, following a typical six-month cycle, even more than against the dollar. That would clearly effect the comparative export ratio of Korea and Japan.

And if the world economy slows down or global oil prices skyrocket, the contribution of net exports to growth will be further weakened.

In addition, overall government fiscal spending may become a catalyst for a slowdown. Simply put, the government cannot continue spending at the same rate it once was, so that spending will inevitably lose its effect. Although the government will maintain its stimulative policy stance next year, it is expected that the government sector will be considerably less powerful than this year.

In brief, as some economic factors behind the Korean economy’s remarkable run of growth will gradually disappear, including a sharp depreciation of the won, proactive economic stimulus measures and low oil prices. As these happen, the national economy is likely to decline significantly.

Korea’s stimulative measures to cope with the crisis by the third quarter of 2009 seem to have been successful.

The United States, worried over slower-than-expected economic recovery, is planning to implement economic policies in preparation for next year’s economic situation.

Therefore, whether the Korean economy will be truly successful may be determined by the economic situation in 2010.

It is inevitable to see a slowdown in the pace of growth in the short-term until the first half of next year after the fourth quarter of 2009.

Thus, if the government accelerates its exit strategies, such as by increasing interest rates, based on the third-quarter earnings, it could become a real burden on economic recovery. When deciding on raising or lowering the interest rates, future prospects and pressure on prices remain the most important factors to consider, rather than current earnings.

A significant spike in year-over-year revenue growth in the third quarter may be seen for one more quarter. But then there could be troubles. This my not in fact be a swift switch from economic contraction to growth.

Therefore, it is time to handle financial and fiscal policies by maintaining the current stimulative economic policy stance and seeking to formulate microeconomic policy instruments to improve the employment situation of the people.

*The writer is the head of finance research team of LG Economic Research Institute. Translation by the JoongAng Daily staff.

by Shin Min-young
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