Beware the ‘double-dip’

The global economic landscape is gloomy. Risks of prolonged stagnation - or a so-called “double-dip” recession - in the U.S. are mounting, while there are ominous signs of a real-estate slowdown and runaway inflation in China. Japan is mired in a recession, while many observers fear that Europe will go down the same path as the U.S market. Hopes that the global economy may have finally turned the corner after the 2007-2009 financial crisis have been dashed.

The uncertainty in the U.S. market poses the greatest threat. Home sales - a barometer of local consumption - recently hit a 15-year low despite ultra low mortgage rates and abundant supplies. The latest housing sector data suggests that the poor job market in the U.S. is squeezing American households. The worst scenario - that unemployment will dampen consumption, hammer the real estate market and unsettle financial markets - may be on the horizon. Charles Evans, president of the Chicago Federal Reserve, recently raised the alarm, saying the risks of a double-dip recession have risen in the last six months because of doubts over the strength of the economy in the near future.

A potential double-dip recession in the world’s largest economy has sent prices of raw materials and equities around the world tumbling, rocking financial and stock markets. Concerns that the sizzling Chinese real estate market will cool down significantly as well as worries about a widespread slowdown in Europe have cast dark clouds over the global economy.

The signs bode poorly for the Korean economy, which has been the most resilient among members of the Organization for Economic Development and Cooperation. Exports - the driving engine of the economy - will likely be hurt by sluggishness in our biggest markets. We must brace ourselves for the possibility of a lengthy global economic slowdown.

For now, we must keep our eyes wide open. Our fundamentals - due to dependency on exports - are too vulnerable for us to be in denial. The government should watch the global economy closely and map out contingency plans against the worst-case scenario.

Both macroeconomic and monetary policies must remain flexible to address the probability of a sudden turn for the worse during the second half. Measures to cushion local financial markets should also be readied.

The government must be prepared to put a hold on its various pro-working class measures if the local economy joins the global crisis. Most importantly, it should continue efforts to strengthen fundamentals by easing regulations and boosting local consumption to maintain resilience to external shocks.