Economy faces 7 hurdles in 2011

By Kang Seung-woo

The Korean economy is facing a bumpy road ahead on its path to full recovery as several economic hurdles, such as a slowdown in the global economy, the China risk and rising raw materials prices are expected to stand in the way of its rebound.

In an international seminar on the outlook for the global economy and financial market for 2011, in Seoul, Friday, the Korea Center for International Finance (KCIF) identified seven key economic risks that could threaten the global economy next year.

The seven hurdles are debt trouble in Europe, the China risk, global currency disputes, the U.S. quantitative easing policy, a possible slowdown in the global economy, rising international prices for raw materials and overshooting in the U.S. bond market.

It said that there is a high possibility for Ireland and Portugal to receive a rescue package from the International Monetary Fund (IMF) and the European Financial Stability Facility (EFSF).

“There are rising concerns for Ireland and Portugal, as the Irish banking industry is on the edge of insolvency and Portugal has failed to speed up the fiscal deficit reduction,” it said.

“If a bailout package is delayed, the crisis might spread to other European nations.”

The KCIF said that the crisis will not settle down smoothly.

“If the bailout deal is reached without a hitch, the worries over all of the eurozone PIIGS will calm down to some extent, but it will not be easy to eradicate the challenges in the early stages,” it said. PIIGS refers to Portugal, Italy, Ireland, Greece and Spain, the countries which were considered weaker economically following the fiscal crisis in the eurozone. It added that Spain and Italy are tinged with uncertainties, such as a possible economic recession and political unrest.

China’s murky outlook can also be a drag in the global economy next year.

China’s consumer price index (CPI), a main gauge of inflation, climbed to a 25-month high of 4.4 percent year-on-year last month, way over its inflation target of 3 percent, raising speculation that the world’s fastest-growing major economy might adopt a tight-money policy.

The property market, which takes up a big portion of the Chinese economy and government revenue, is faltering due to inflated supply and possible pending regulations, which can also weaken growth engines like consumption and investment.

The KCIF also said that conditions at home and abroad will not be favorable to its exports.

“Export growth will drop from about 28 percent to about 13 percent due to declining demand from its leading importers European Union (EU) and the United States,” it noted.

The currency issue has been a long-standing one, but since late 2009, the global currency feuds have sharply escalated.

In addition, as the United States has failed to have a bigger say on the issue than before, settling the problem requires more difficult stages.

The recent disputes are comprised of a combination of several factors _ global imbalance, a slowing U.S. economy (long-term factor) and Japan’s currency intervention and political events (short-term factor).

“Although short-term factors have been ruled out, it will frequently come to the surface unless the global imbalance shrinks,” it said.

“The United States and China are expected to solve the issue via bilateral talks rather than multilateral negotiations, while other countries will try to unravel the issue in the framework of the agreement reached from the G20 Seoul Summit and Finance Ministers and Central Bank Governors Meeting in Gyeongju.”

The global economy has lost momentum since the second quarter of this year. Fears of a double-dip recession have been rising, as well.

Southern European countries have relapsed into another financial crisis, hitting the global markets hard, but there is a slight possibility for a double dip to occur.

It said that the gross domestic product (GDP) growth of the global economy is forecast to tally 4.2 percent in 2011, down 0.6 percentage points, according to the IMF.

“Global trade growth will decrease from 11.4 percent in 2010 to 7 percent in 2011,” it said.

The KCIF said that the $600 billion U.S. money-easing policy will have a limited effect in lowering interest rates to stimulate the economy.

“The policy can trigger asset bubble risks in emerging markets. In addition, the inflow into them can float their currencies to hurt export competitiveness,” it said.

The KCIF said that soaring raw material prices and a potential overshooting in the U.S. bond market are factors to watch for in the upcoming year.

Meanwhile, it said the won appreciation will continue and the local stock market will post modest gains on the back of a further upside in the global market.

ksw@koreatimes.co.kr