[Viewpoint] ‘Perfect storm’ may be in the making

The summer heat is here, and yet the temperature of the world economy is dropping quickly. Industrial activity around the globe has lost steam while consumption has failed to pick up. The skeptics are already betting the global economy will retract. Stock markets worldwide have been on a losing streak for several weeks now. The fall of oil and other commodity prices, which should have been good news for the financial markets, is instead viewed as an ominous sign of an economic slowdown.

Authorities who beamed over the pace of recovery in their economies from the global financial crisis defend the weakening tone in their economic data as a soft patch, which is common before an uptick. But various risks looming over the global economy suggest that the slowdown may last longer than expected.

The U.S. economy, which can sway the global market, has turned decisively weak. The pace of growth, driven primarily by stimulus measures implemented by the U.S. government and Federal Reserve, lost speed because of sluggish consumption and a stubbornly high jobless rate. Economic prospects further darkened as confidence indicators lowered.

The signs in the U.S. are bad - manufacturing in May fell sharply while inflationary pressures are building up fast. Worst of all, the unemployment rate was more than 9 percent, signaling that the economy may be heading downward. The housing market that triggered the financial meltdown in 2008 remains doggedly sluggish.

Despite the alarm bells, the U.S. government and central bank have run out of ammunition to fight the obstacles and sustain growth. The government cannot dare to increase spending with the deficit and debt already at dangerous levels. The Federal Reserve’s quantitative easing through a government bond-buying program also ends this month and won’t likely be reattempted given inflationary risks. Further stimulus steps would be justifiable in times of emergency, but not when the economy is gradually losing steam.

The situation in the eurozone, battling the Greek debt woes, had European officials trying to devise a rescue plan for Greece. Apart from Germany, most economies in the euro zone remain in the doldrums as governments carry out austerity measures to improve their credit portfolios and avoid a crisis like the one in Greece.

The European Central Bank is more preoccupied with containing inflation and won’t likely agree to any moves to stimulate the economy. Europeans for now cannot afford to tend to growth figures amid struggles to prevent credit risks from reaching their borders.

China may avoid a hard landing, but it is uneasily juggling high inflation and slower growth. If it continues with efforts to boost growth, it could risk fanning inflationary pressure. One wrong move could burst the real estate bubble that has pushed up property prices to all-time highs and resulted in a cascade of nonperforming loans.

Japan, which is devastated by the earthquake and tsunami and ensuing nuclear power crisis, has been muddling through a show of miraculous tenacity. It may, however, manage to pull out of its difficulties through emergency measures to clean up the disaster and rebuild the economy.

Major economies are all showing uneasy signs and little confidence in how to overcome the downside risks. If any one of the economies misses a step in its balancing act, it could trigger a domino explosion of risk factors around the world. Under the worst-case scenario, if European leaders were to fail in their struggle with the credit crisis and hammer the global financial market, the U.S. economy could slip into the sinkhole, while China could face a harsh landing.

A “perfect storm” of financial and economic woes from both sides of the Pacific and Atlantic may be in the making. With individual economies engrossed in their own problems, the joint stand of the G-20 economies may also be difficult.

Regardless of the turmoil, our economy has no sense of emergency. Paying little heed to the worrisome developments in global markets, politicians are busy concocting ways to shave and subsidize education costs to win votes in the next elections.

If the economy worsens due to poor global demand, all of the talk about better welfare for all will be in vain as we simply won’t be able to afford it.

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

By Kim Jong-soo