Double-Dip Downturn May Hit Economy
A noted global economist said that countries should seek exit strategies later rather than sooner, as there are still chances that the global economy will slip into a double-dip downturn due to sluggish spending.
Sohn Sung-won, a professor of economics and finance at California State University, stressed the importance of the timing of exit plans, likening economic policymakers to firefighters.
"A firefighter's first rule of survival is 'know your way out.' The timing of an exit strategy is critical," Sohn said in an interview with The Korea Times.
"If it is implemented too soon, the economy could falter since much of the current economic strength from Korea to the United States is coming from stimulus programs. Toward the end of 2010, the effect of stimulus policies will be gone," he said.
"If an exit strategy is implemented too late, bubbles in the stock and property markets could develop along with higher inflation. There are concerns that bubbles are already developing, especially in China," he added.
Sohn, who served as president and CEO of Los Angeles-based Hanmi Bank, and executive vice president and chief economic officer of Wells Fargo Banks, was a senior economist on the President's Council of Economic Advisors at the White House.
He was named the most accurate economist in the United States by major media including The Wall Street Journal and Bloomberg News.
Sohn advised that it is better to be late than early. "If the global economy were to lapse into deflation, it would be extremely difficult to come out of it as evidenced by the Japanese economic situation. The problems associated with deflation are many and difficult."
Problems with modest inflation, meanwhile, are less acute and easier to correct than those of deflation, according to the professor.
Sohn expects the Bank of Korea to raise the interest rate sometime during the second quarter. "Korea's economic growth has exceeded all expectations. The strong economy points to tighter monetary policies and higher interest rates. The focus of monetary policy will shift from supporting economic growth to potential inflation concerns. In 2010, stronger domestic demand and rising commodity prices will add to inflationary pressures."
He added that the independence of the central bank dictates that there should not be even an appearance of influence from the government.
Sohn said the Korean economy, which is "like a ship in a vast ocean," won't be an exception if the global economy falls into a double-dip recession.
He said there are some reasons for worrying about this scenario. "Normally, the private sector of the economy should be strong enough to offset the phase-out of the government stimulus. Unfortunately, that is not the case," he said.
U.S. consumers, for example, whose spending accounts for about 70 percent of the U.S. economy, were the locomotive pulling the global economy forward, making China one of the primary beneficiaries.
Now, however, they are in no position to go on another spending spree, due to poor job market conditions.
"Even with the ongoing economic growth, potential employers are unwilling to hire people. They want to make sure that economic recovery will be sustained before adding people to payrolls. The unemployment rate will continue to rise well into 2010. Without jobs, consumers are unlikely to open their wallets."
He cited the lack of availability of credit as another constraint on consumer spending. "Given rising delinquency rates on consumer loans, banks are cautious about lending. Credit is all about trust and confidence. Trust has been broken; it will take some time for trust to be revived."
U.S. consumers, whose savings rate dipped into negative territory before the financial crisis, are also saving more to rebuild their depleted net worth following the collapse of assets. More savings means less consumption.
He also showed concern over commercial real estate, where prices have fallen about 40 percent from their peak in 2007. As it is very difficult to get financing on commercial properties, there are very few transactions.
"With the stimulus from government programs diminishing, the weakness of the private sector points to the possibility of a double-dip recession. How the various governments handle their exit strategy will determine whether a double-dip becomes a reality or not," the professor said.
Sohn expects the value of the dollar to go down this year. "The value of the dollar is keenly dependent upon the strength of the global economy. If the global economy improves as expected, investors will be willing to take more risks by investing in emerging market nations including China, Korea and Russia. As money continues to pour into these countries, the currency values will appreciate and asset prices including stock prices will go up," he said. In case of a double-dip, however, the opposite could happen, he added.
While a stronger won would make Korean exports less competitive, Sohn pointed out that "the value of a currency should be viewed as a score card for the country." A stronger Korean won indicates higher confidence in the economy.
"There are other benefits of a stronger won. It tends to limit inflation. It also forces Korea to raise productivity and efficiency to regain its competitive edge. The product mix could switch to less labor intensive and higher-value added goods and services."