2012 outlook: bracing for confidence crisis
To mark the beginning of 2012, we have prepared three in-house analytical pieces to visualize the landscape for the global economic, financial market and business trends this year. At the same time, we asked 16 economic experts and business leaders about what forces will drive the business world this year. — ED.
By Kim Jae-kyoung
A new year has just begun. People both here and abroad may feel more worried than thrilled about the start of the Year of the Dragon due to numerous challenges surrounding the global economy and financial markets.
It is likely that “confidence crisis” will be the keyword of 2012 as triple negative shocks from Europe, the U.S. and emerging economies are expected to combine to set the global economy back again and undermine investors’ confidence, which many believe will prod investors into switching out of emerging economies.
In 2008, the financial crisis triggered by the collapse of U.S. investment banks shook the world. It mutated into an economic crisis in 2009 and is now sweeping through the global economy in a form of fiscal crisis due to the hangover of aggressive stimulus implemented over the past few years to keep the economy afloat.
The global economy has made headway since the 2008 financial crisis but few believe that this was the beginning of a new growth trend. Many experts claim that it was a temporary rebound powered by stopgap bailouts in the West.
“The economic improvement since 2008 is largely a mirage, fueled by unsustainable government assistance in the West and bubbles in emerging economies,” independent economist Andy Xie told Business Focus.
“Both will unwind in 2012. The mirage will be unmasked. If you think 2008 was bad, fasten your seatbelt for 2012. The world may not end. Your wallet might,” he added, forecasting that the debt bubble in the emerging economies is bursting as hot money flows back into the U.S. Xie, a former Morgan Stanley economist, is well known for forecasting the 1997-1998 Asian currency crisis.
What is most worrisome is that if such developments occur, the world may fall into the trap of the so-called confidence crisis or self-fulfilling crisis, a crisis driven by a fall in confidence rather than by poor economic fundamentals.
Korea and other emerging economies have to be careful in handling this turmoil because they are susceptible to a confidence crisis, which occurs when an economy is subject to an exodus of foreign capital as the result of investors’ loss of confidence in the market where fears feed on other fears.
“There will be a slowdown in emerging countries in 2012. These countries will therefore no longer be an Eldorado for investors where they can simultaneously find vigorous growth, exchange rate appreciation and rising financial markets,” Natixis chief economist Patrick Artus said.
“If the loss of growth in emerging countries were to be too pronounced, investors might switch from emerging countries to OECD countries on a more permanent basis, which would be a total reversal of the trend seen in the period 2002-2008,” he added.
Besides, chances are high that a political crisis will add to such an ugly scene as lots of countries, including the U.S., China, France, Russia, the Middle East and Korea, will go through leadership transitions through elections, which are feared to create confusion in their respective economies.
“Politics will be one of the key factors in the global economic outlook in 2012. Korea will not be an exception, given the geopolitical risks surrounding North Korea as well as two key elections in the South,” Oh Suk-tae, the regional chief of Standard Chartered First Bank Korea, said.
Triple whammy and stagflation
The rationale behind such a bleak outlook is that triple shocks will intensify the degree of volatility in 2012. First, the eurozone debt crisis is far from over. Fears over PIIGS (Portugal, Italy, Ireland, Greece and Spain)countries are easing but uncertainties are still lingering as investors doubt if austerity measures agreed upon by European nations will actually take place. A large amount of treasuries in the region maturing from February and April will be another test.
Second, emerging economies, including BRICs, will undergo a slowdown. Growth in emerging countries is decelerating due to the weakening of their exports, primarily due to the slowdown in exports to the eurozone, which is likely to lead to the bursting of debt bubbles.
Last, but not least, shocks from the eurozone and emerging economies could get the U.S. economy off track again, together with political bickering and confrontations triggered by the presidential election slated for November. The U.S. economy has benefitted from strong demand in emerging economies over the past few years.
“The European crisis is far from resolution. It is possible that the Europeans could continue to muddle along through 2012, but an intensification of the crisis cannot be ruled out,” Marcus Noland, a senior fellow and Asia expert at Peterson Institute for International Economics, told Business Focus.
“Asia has remained a bright spot through the turbulence of the recent past, but China is slowing and going through its own leadership transition.Finally, the potential for renewed political upheaval in the Middle East could roil oil markets,” he added.
Taking all things into consideration, more quantitative easing (QE) is expected both in the U.S. and Europe in the middle of 2012, which some expect will usher the world into an era of stagflation, a deadly cocktail of stagnant growth and rising inflation — a period of slow economic growth and high unemployment with rising prices.
“More QE may bring temporary relief to financial markets.But they won’t restore economic growth on their own.The global economy suffers from structural problems cumulated over the past two decades. Reforming is a long and arduous process.Reviving growth is just not possible.QE only leads to stagflation,” Xie said.
Korea in better footing
The gloomy outlook for major economies is obviously bad news for the Korean economy as the country relies mostly on external shipments. However, it is on a better footing than most other countries.
Depending on how it copes with the situation, Korea can turn this challenge into an opportunity. In fact, Korea’s economy has held up well in 2011 despite negative shocks from abroad. This year China may emerge as the savior for Korea. The Chinese economy is expected to see a mild slowdown but it may manage to stay the course.
HSBC economist Ronald Man said that growth concerns have crept to center stage owing to the deterioration in external conditions but shipments are likely to be supported by sustained growth in China.
“China now imports more from South Korea than the U.S. and EU combined. A weak won should also give an extra lift to Korean exporters, especially against close Japanese competitors,” Man said.
“Attention should be focused on the domestic front. Stagnant real wage growth, flat property prices in Seoul and still rising household debt will continue to sap disposable income and, in turn, private consumption,” he added.
Since inflation is unlikely to be a major issue due to weaker global demands and Korea has more ammunition to fight, the government should adopt careful but determined approaches to boost economic growth.
“While the 2012 budget centers on both job creation and fiscal balance in 2013, achieving both targets will prove difficult. The government is likely to prioritize sustaining the labor market, and adopt a more expansionary stance,” Man said.
“Its financial system is undoubtedly strengthened by relatively low short-term external debt, high FX reserves and strong dollar swap lines. But fiscal stimulus and an extended period of accommodative monetary policy will still be required to help the domestic economy withstand turbulence from Europe,” he added.