Fiscal cliff casting a shadow over Korean economy

As concern mounts that the United States will teeter on the brink of a fiscal cliff next year, forecasts for the Korean economy are looking increasingly pessimistic.

If Washington fails to reach an agreement on how to raise tax revenues and pushes ahead with spending cuts, Korea will face the daunting prospect of 3 percent growth next year, marking a drop of 0.5 percentage point from earlier predictions, according to a report by the National Assembly Budget Office (NABO) yesterday.

“If the financial cliff happens as expected, the global economy will go into an extended recession,” the NABO report said. “Korea would suffer from fluctuating overseas stock markets, and exports would keep dropping.”

The report warned that the real economy would also be dealt a blow, causing Korea’s GDP to fall.

The fiscal cliff refers to a series of budget cuts and tax increases that are scheduled to take place in the U.S. in the coming weeks and months unless Washington reaches an agreement to postpone them.

“The U.S. economy would post a minus 0.9 percent growth next year, if the fiscal cliff negotiations go badly, which would negatively affect the rest of the world,” said Kim Jong-man, a researcher at the Korea Center for International Finance.

Korea is facing a continued slump in investment due to the corporate sector’s reluctance to loosen its purse strings amid lingering uncertainties, said a report on current economic situations released by the Korea Development Institute yesterday.

“Even though Korea saw exports finally start moving up, as well as a slight improvement in consumption, business investment continued to remain sluggish in the third quarter,” the report said.

It said the country’s facility investment index plunged 8.2 percent on-year in September, although it improved from the previous month’s drop of 14.2 percent.

The think tank also noted that the global economy faces uncertainties stemming from the euro zone debt crisis.

Obama sent a budget plan for 2013 to Congress in February with a major revision aimed at enhancing the U.S. economy’s fiscal soundness.

If Obama and House Republicans can’t hammer out an agreement by the end of the year, the U.S. economy is doomed to be hit by a fiscal contraction worth $600 billion in 2013, investment banks around the world predict.

This will not only push the U.S. economy back into a recession, but also potentially send other economies like Korea’s into nosedives, local analysts say.

By Song Su-hyun [ssh@joongang.co.kr]