Good economy, strong defense

The economy is showing ominous signs of losing steam amid escalating security tension in the wake of North Korea’s attack on inhabited Yeonpyeong Island.

According to the National Statistical Office, industrial output fell 4.2 percent in October from the previous month in the sharpest fall in 22 months.

Capital investment also plunged 9.5 percent from September and the average operation ratio of factory lines slipped to 79.5 percent in October compared with 84.8 percent in July.

Inventories fell 1.2 percent on month while the index of inventories for deliveries went up to 102.6 in October from 95.2 in July. Companies are bracing for sluggish demand by reducing output and drawing down inventories instead. The data is warning of a slowing economy.

The leading economic index that forecasts business activity in months ahead fell for the 10th month in a row and the index indicating present business activity also slipped for the third consecutive month. The economy that once prided itself on its resilience may join the global trend of economic slowdown.

The Ministry of Strategy and Finance, however, attributed the less-than-expected industrial activity in October to seasonal factors, maintaining that the economy is still on the path of growth. It stood by its rosy forecast of 5 percent growth next year.

But domestic and external circumstances do not bode well for the country’s economic prospects. The security risk heightened by the latest fierce attack on Yeongpyeong Island will likely dampen investment sentiment and the outlook for overseas demand remains murky due to a slow recovery in U.S. economy and debt problems in Europe.

The government’s assurance that the economy will pick up after December sounds hardly convincing as most other private banks have downgraded their growth forecasts for the Korean economy in 2011 to a range between 3 percent and 4 percent.

Against this backdrop, we cannot afford to be optimistic about the economy. Finance Minister Yoon Jeung-hyun in a recent emergency economic meeting ordered each ministry to be aware of the North Korean risk factor and external uncertainties. We have entered the unsettling phase of hosting imminent military threats and longer-term economic risks. A thorough contingency plan would help more than blind optimism. A stable economy is the bedrock for national security.