Protect the economy first

Samsung Economic Research Institute revised down its forecast for Korea’s economic growth next year to 3.6 percent. This is the lowest rate seen in recent decades, except for periods of economic crisis in 1997 and 2008. Similarly, the International Monetary Fund has downgraded its forecast for world economic growth next year to 4.0 percent from 4.5 percent as the United States and Europe, two of the three engines feeding the global economy, lose steam.

Greece is facing bankruptcy and Italy, Spain and France are teetering on the brink of catastrophe. Their sovereign and bank credit ratings are expected to tumble. Euro zone banks need the financial support of the European Central Bank. The U.S. is faring no better as its economists rack their brains to cut government spending and increase tax revenue, which would cause consumption levels and imports in the world’s largest market to drop. What is alarming is that these problems are not likely to go away in just a couple of years. A full recovery will probably take considerably longer.

All of which bodes ill for the Korean economy, which is heavily dependent on external trade for growth. The signs are already manifesting themselves. Samsung Group, the country’s largest business group, has shifted into emergency mode to brace for another tough year in 2012. Industrial activity in the mining and manufacturing sectors has slowed for the last two months and inventories are piling up. Exports to the U.S. and Europe have slowed dramatically. The nation is offsetting that with shipments to China but the situation is not sustainable if poor market conditions in Europe and the U.S. continue. In addition, future twists and turns in the foreign exchange market are almost impossible to predict. The country has built up its foreign exchange reserves and decreased its short-term external debt to help prevent a repeat of 2008.

But the government cannot lets its guard down, as European banks hold nearly 50 percent of Korea’s debt and Europeans rank as the largest investors in the Korean stock market, accounting for one-third of foreign funds. If conditions on the Continent worsen, nothing is stopping them from pulling their money out - a move that would send the local currency market into a state of chaos. Household debt, which is also dangerously high, could also explode at any moment. The economy has entered a danger zone. Yet politicians are leisurely talking about increasing welfare spending while neglecting the obvious need to prepare for a low-growth economy and another global crisis.