wallstreetturmoil Contagion Begins, Recession Arrives
Korea Faces Headwinds of Global Recession
By Kim Jae-kyoung
Staff Reporter
Many Koreans may not have felt the pain yet, but the financial malaise triggered by the Wall Street crisis is spreading widely throughout the world, driving the global economy into recession.
The fallout from the failed $700 billion bailout for Wall Street has sped up the spread of the crisis, which has now hit Europe, with several banks there ― B&B in the United Kingdom, Fortis in Benelux, and Hypo in Germany ― going belly up.
Analysts said that unless the U.S. bailout plan is passed and the liquidity problem resolved soon, the shockwave will spread pain throughout the world, contracting the global economy.
They point out that the worldwide crash on the stock and housing markets have reduced households' wealth significantly, dampening both consumer and business sentiment.
``I think the contagion has begun. Several European banks went under and many more are undercapitalized,'' Stijn Van Nieuwerburgh, a finance professor from the Stern School of Business at New York University, told The Korea Times.
``Given the broad participation in equity markets by households worldwide, the 25 percent drop in stock markets over the last year has severely affected household wealth,'' he said.
``Add to the 15 percent drop in housing wealth over the last year, and the weakening of the labor market, you are looking at a substantial recession in the U.S. for 2008-2009,'' he added. ``The same effects are at work worldwide. So, I expect a substantial reduction in worldwide GDP growth.''
Europe and Japan are already slipping into recession due to sluggish exports caused by the U.S. credit crisis. The Eurozone saw its GDP growth contract by 0.2 percent in the second quarter, while the Japanese economy shrank by 3 percent.
South Korea is also facing the headwinds of the global economic recession, with its fallout creeping into the world's 13th largest economy through multiple channels ― reduced exports, lower profits and sluggish consumer and business sentiment.
The nation's current account deficit reached a record high in August due to a slowdown in export growth. The shortfall came to $4.71 billion, bringing the shortfall for the year to date to $12.6 billion.
Big companies' business confidence for October fell to the lowest level in five years, while industrial output grew only 1.9 percent in August from a year earlier, a major setback from the previous month.
In its latest report, Citigroup forecast that GDP growth will slow from 4.4 percent in 2008 to 3.4 percent in 2009.
``Sub-par GDP growth in Korea will continue well into next year, as strong headwinds against growth, weakness in the global economy and the tightening of domestic credit are not likely to disappear anytime soon,'' Citigroup economist Oh Suk-tae said.
``The slowdown of the global economy, the lingering impact from high commodity prices and tightening policies of key emerging markets will eventually weigh on Korea's exports,'' he added. Once exports, the sole engine for economic growth, lose steam, chances are that the economy will undergo a painful and deeper downturn.
The Korea Economic Research Institute also predicted that GDP growth will slow to 3.8 percent next year, following a projected 4.2 percent growth for 2008 in the wake of the global recession.
The bigger concern is a deepening dollar shortage caused by a global liquidity problem. Korean banks and businesses are struggling to secure dollars due to a severe dollar shortage caused by the widening shortfall in the current account and foreign capital outflow. The financial community is trying to lock up liquidity so that even healthy companies and individuals are finding it difficult to access credit.
Experts stressed that the liquidity problem should be a top policy priority to save the entire economy from getting worse, and to prevent good companies from going bad.
``The current crisis is creating a liquidity problem that if not remedied will have a disastrous impact on companies around the world,'' former AMCHAM Chairman Jeffrey Jones said.
``With no access to credit, we will find a new round of business failures, personal failures and a further meltdown of financial institutions, which will affect confidence in the economy,'' he added.
Global consulting firm Bain & Company's Corporate Renewal Group projects that speculative-grade debt defaults will increase in the U.S. by five to 10 times over the next 24 months, leading to a wave of big-company bankruptcies ― a nearly eight-fold increase over 2007.
``The woes afflicting the financial services industry should serve as a warning to other sectors that the economy faces an imminent tidal wave of corporate bankruptcies,'' said Sam Rovit, a partner in the Bain Group and former CEO of Swift & Company in his latest research note.