[Viewpoint] Bracing for another downturn

The U.S. economy may be coming down with another cold. And it may send its contagion to other parts of the world that have just barely recovered from a two-year downturn. The world’s largest economy is showing ominous signs of heading toward a double-dip recession or flat growth.

If the U.S. sinks back into a recession, the repercussions will likely spill across the Atlantic and Pacific. U.S.-bound exports from China and Europe will fall, affecting the pace of growth in many parts of the world. The Korean economy that fared relatively well among the OECD members thanks to brisk exports to these markets would inevitably feel the pinch.

Export-driven growth will likely slow down, and the shipping and shipbuilding industries, which are directly linked to external trade, will suffer another blow.

The fragile recovery in employment conditions can wither, and sluggish local consumption could become a slump. The U.S. problems that weighed down heavily on our economy until last year may once again cause harm.

Recent U.S. data indicate that the economy is stumbling downhill toward a double-dip recession. Gross domestic product growth has been slowing after hitting 5 percent in the last three months of 2009. The economy grew 1.6 percent in the second quarter from a year ago, down from a preliminary estimate of 2.4 percent last month. The unemployment rate hovers around 10 percent, and the housing market remains in the dumps despite low mortgage rates and greater availability.

Home sales - a sensitive barometer of consumer demand - are crumbling fast. Existing home sales in July slipped to a 15-year low, and sales of new homes were at their lowest level since the government began tracking the data in 1963. The plunge in home sales suggest that consumers expect housing prices to fall further, and such sentiment can eat away asset values. It brings back the nightmare of the subprime mortgage crisis.

The jobless rate after hitting a peak of 9.9 percent in April has been edging down. But its descent stalled at 9.5 percent in July.

All the financial and monetary stimulus and emergency measures have failed to generate jobs. The rampant unemployment suggests stagnant income growth, and without an increase in income, Americans cannot resume spending.

Depressed spending in an economy where consumption demand accounts for 70 percent of the economy will inevitably pare down the GDP figures. Wherever you look, the signs are there. The economy is staring straight ahead at another recession after a short-lived recovery.

But the problem is that the U.S. government and central bank have used up all the remedies and are running out of options to revive the economy. Deficits in the federal and local government budgets have swollen to such levels that spending additional amounts on economic stimulus measures is unthinkable.

The Federal Reserve also cannot do much. Federal Reserve Chairman Ben Bernanke tried to play down concerns for a double-dip recession and assured that the central bank has an emergency kit ready just in case. He indicated that the Fed could resume large purchases of long-term Treasuries to help further lower mortgage rates and increase liquidity. But how much the Fed can inject into the economy is uncertain.

Carefully choreographed steps to repeat the international coordination that took place to deal with the 2008 global financial crisis will not be easy this time. European countries that have decided to slim down their budget deficits after the Greek sovereign debt crisis won’t likely agree to another monetary expansion.

China, trying to tackle runaway inflation and the risk of the real estate bubble bursting, also cannot afford to increase spending. Concerns for a double-dip recession pose a bigger conundrum than before.

Yet Korea appears to be overly calm in the face of these alarming signs. The government, still flush with the unexpectedly strong growth figures in the first half, may believe that the economy will somehow muddle through in the second half. It appears to have no plans to revise the rosy macroeconomic policies and outlook mapped out in the first half.

Authorities are busy rolling out details to the president’s grand ideas of making working class lives better. And the Bank of Korea, which has been exaggerating inflationary risks, appears to be confounded by recent signs of deflation from the U.S. and Japan. The central bank has been tip toeing toward an exit from current expansionary policy and raising interest rates down the road.

But authorities should be serious about the probability of a prolonged slowdown or another recession in the U.S. and global economy. They must undertake radical steps to boost domestic demand as it is the only option that can offset losses from exports and ease the growing income gap.

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

By Kim Jong-soo