A bumpy uphill for 2022
The author, former chief economist at the Asian Development Bank and a senior adviser for international economic affairs to former President Lee Myung-bak, is a professor of economics at Korea University.
The mountains were crowded with climbers enjoying the first weekend without social distancing restrictions under the new “With Covid” policy. Even with masks on, faces glowed as the hikers followed the forest trails. Everyone was happy to be finally returning to everyday pleasures they had to give up due to the virus outbreak. Economic flows resemble a mountain track with both uphill and downhill streams. An economy repeats its up and down cycles in a journey to a peak. The hard climb is rewarded with a panoramic scene along the top and sometimes requires clever maneuvering in the face of life-and-death moments at steep heights.
The global economy has been heading up this year after plunging into a deep valley during the Covid-19 storm. Output from key markets like the United States and China has recovered to pre-pandemic levels. According to an economic outlook by the International Monetary Fund (IMF) in October, the global economy is projected to grow 5.9 percent this year in a V-shaped rebound from a contraction of 3.1 percent last year. The world economy is expected to run smoothly in 2022 — 4.9 percent on global average, 5.2 percent in the U.S., 5.6 percent in China, and 3.3 percent in South Korea.
Still, the uphill path may be bumpy due to uncertainties in the economic climate and various stumbling blocks. The spread of variants of the virus and quarantine failures pose the biggest threat to economic recovery and life. A steep rise in inflation is another danger. Monetary supply and fiscal spending by governments to fight Covid-19 are aggressive and supply cannot keep up with an upsurge in demand from economic recoveries. In developing countries, industrial activity has been disrupted due to slow progress in vaccinations.
Shipping has been delayed, causing supply bottlenecks, which increase prices. Prices of energy, farm produce and metals are at their highest since 2014. In October, the inflation rate soared 5.8 percent in the U.S. and 4.1 percent in the euro zone. In Korea, consumer prices gained 3.2 percent, the steepest rate in nine years and nine months. Most economic institutions project inflation to stay strong next year. If strengthening of energy prices and bottlenecks in global supply chains are prolonged, the global economy inevitably would receive a blow.
The shock from rolling back the massive money unleashed on the global financial market and a liftoff in interest rates are more headwinds. The U.S. Federal Reserve will start tapering from November by reducing purchases of treasuries and mortgage-backed securities by $15 billion each month. Since recovery has become evident, the Fed is soaking up liquidity and trying to contain a further rise in prices. Under that timetable, the Fed would wind down its bond purchase program over the next eight months and could start raising interest rates in the second half. If inflation does not come down, tightening through tapering and rate hikes could be quickened. When international rates go up, funds pull out of emerging economies and trigger tantrums on financial markets.
Global commerce conditions also are not favorable. The U.S-China conflict over technology and trade has escalated and friction is inevitable due to various trade protectionist moves in big economies. Geopolitical risks linger in Taiwan, North Korea and the Middle East.
The South Korean economy is susceptible to the winds of the global economy and financial markets due to its high reliance on external factors. Supply of key raw materials and parts hinging on a certain nation must be stabilized. Such fiascos as the shortage of urea due to export curbs by China must be prevented. Authorities also must take extra care to prevent international shockwaves from upsetting our foreign exchange and capital markets.
Household debt must be contained, and individuals as well as companies must be forced to improve their financial health. Asset prices should become stabilized so as not to stoke sharp rises in consumer prices.
Despite the government’s best endeavors, the battle with Covid-19 continues. Infections are rising along with anxieties in the early stage of returning to normalcy. Authorities must not let down their guard in quarantine and economic management. In mountain-climbing, going down can be more dangerous than going up. Due to many uncertainties, one must stay vigilant until arriving at a safe destination.
Despite improvement in economic data, Koreans face the new year with the burdens of high prices, interest rates and debt. The Organization for Economic Cooperation and Development projected that South Korea’s growth potential in per capita GDP could fall to 1 percent and the zero percent range. The working population has been thinning due to a low birthrate and national liabilities are rising.
A new administration will take office in May. The new government must study the failures of its predecessor and draw up a clever strategy towards a right economic goal. The incumbent government has erred from the start by setting the goal on income-led growth. Policies to stimulate labor and investment were lacking and government intervention was excessive. It failed to produce quality jobs and economic inequalities deepened due to a spike in real estate prices. We hope a new leader could set a new direction for an uphill journey to a better place.
Translation by the Korea JoongAng Daily staff.