New year, same old story
Will next year be better? The question always comes up as we near December. Various institutions are churning out economic outlook reports for 2015, and “gloomy” sums up forecasts for the global economy by institutions at home and abroad. The world economy will be slightly better than this year, but still moving in slow motion. There are few signs of optimism.
On the global outlook, the world’s gross domestic product is estimated to grow 3.5 percent in 2015. The International Monetary Fund was more upbeat, giving an estimate of 3.8 percent, but the U.S. Conference Board forecast a rate of 3.4 percent. The global economy is estimated to grow between 3.3 percent and 3.5 percent this year.
The United States is likely to do best among advanced nations. Its growth is expected to accelerate to 3 percent from this year’s estimated 2.2 percent. The euro zone, which likely will end 2014 with zero growth, may be able to squeeze out growth of 1 percent. Japan will likely remain lethargic, its growth inching up 0.8 percent after this year’s 0.9 percent. China’s growth will moderate to 7.1 percent. Average growth in emerging economies will be about 5 percent. Overall, the global economy is in the new normal - low growth, consumer prices and interest rates. Depression will weigh on the world economy next year as well.
South Korea’s growth rate is projected at between 3.5 percent and 3.7 percent, in line with this year’s estimated 3.5 percent. What’s interesting is that Korea’s growth correlates with the pace of global growth. The phenomenon has been going on for a few years. The parallel mirrors the local economy’s place in the world economy - in between advanced and emerging economies with a high rate of liberalization and opening. It also underscores that fact that the economy hinges on global economic trends and factors.
The biggest influence for next year’s economy will be monetary tightening in the United States. Investors are closely watching the timing and scope of rate hikes by the U.S. Federal Reserve. When the Fed announced this year it would start to cut back its massive quantitative easing begun in the wake of the financial meltdown in 2008, capital flight was expected to wreak havoc on emerging economies. But the worries have mostly been factored in. Interest rate increases are expected to be moderate starting in the latter half of 2015. The United States cannot act unilaterally when the global economy remains lackluster.
Sharp drops in oil prices also will likely hamper any tightening moves. International oil prices have plunged more than 30 percent since August. U.S. consumer prices rose 1.4 percent in October, below the Fed’s inflation target of 2 percent. If they fall further due to cheaper oil, the Fed likely would have to push back its tightening schedule. Oil price drops also can affect the shale gas industry that has been leading U.S. economic resurgence. The International Energy Agency estimates U.S. shale gas investment could fall 10 percent next year due.
Any setback in the U.S. economy also could deal a blow to the global economy. West Texas Intermediate for December delivery fell below $80 per barrel. The break-even point for American shale players is estimated at $76. Price cuts in crude could cause a pause in U.S. shale boom.
Also in the pipeline is a second sales tax increase in Japan. Japan raised its sales tax to 8 percent from 5 percent in April and another hike is planned for October 2015 to bring the base up to 10 percent. That would almost certainly splash cold water on the feeble recovery in consumption in Japan, where retail sales in the second quarter contracted after the tax increase, pushing GDP growth into negative territory. The Bank of Japan decided to expand its bond-purchase program to more than 10 trillion yen, which drove the U.S. dollar down to 115 yen. An additional tax hike undoubtedly would be another shock to the domestic economy and currency value. Some bureaucrats and politicians want the second sales tax hike pushed back to 2017.
On the domestic front, the key will be structural reforms. Choi Kyung-hwan, deputy prime minister for economy, already has used his two policy arrows - fiscal and monetary easing. The third arrow - structural reform - must hit the bullseye to complete the stimuli formula. If it misses, the administration’s economic policy would likely fail, as Abemonics was based on the same three-pronged approach in Japan. Next year will be the only year in her five-year term that President Park Geun-hye does not have a major election on the calendar. It could be the best time to push ahead with reform.
Improvement in inter-Korean ties and economic cooperation also can play an important factor. Some are optimistic that the two Koreas will put aside their differences and find a breakthrough in bilateral ties to jointly commemorate the 70th anniversary of the Korean Peninsula being liberated from Japanese colonial rule. Seoul has been under pressure to ease or lift the sanctions against North Korea in place since the deadly attacks in 2010. The recently struck free trade agreement between South Korea and China included products manufactured on North Korean soil like the Kaesong Industrial Complex as tariff-free items. Inter-Korean economic cooperation could serve as an impetus for economic growth.
JoongAng Sunday, Nov. 16, Page 19
The author is the head of the Economist, a weekly business news magazine published by the JoongAng Ilbo, and the Korean edition of Forbes.
By Kim Kwang-ki