Macroeconomic and international finance division
Each year in October, the Korea Institute of Finance (KIF) publishes an economic outlook for the coming year. The season has come around once more, and the past year’s memories with it.
Last fall, the global economy was embroiled in a series of disastrous events, including the downgrade of the U.S. sovereign rating, rising concerns for a double-dip recession and deteriorating debt woes in the eurozone with the possibility of a Greek exit. A team of KIF researchers working on the macroeconomic forecast, including myself, produced a rather optimistic view that the economy would display a gradually upward movement. That is, the economic gloom would linger in the first half of 2012, but begin to look up in the second half of the year, bolstering the economic growth. At the time, my colleagues said half-jokingly that such forecasts missed every time and we should just bet on the opposite. In retrospect, the joke turned out to be true after all.
As I set about working on the economic outlook for the next year, I felt a little wary about giving the same, hopeful outlook. For now, it seems that the economic conditions, both at home and abroad, would turn around by the second half of 2013. However, would the recovery be strong enough to be described as an upward movement? The current external conditions suggest that it might not be the case.
Next year, the eurozone economy might contract amid the prolonged debt crisis. Spain, the biggest threat in the eurozone, is expected to apply for financial aid sooner or later and as its effect materializes, the economy might begin to stabilize, as long as political unrest can be kept in check.
Meanwhile, the crisis might harass Italy and France, countries that have made only feeble efforts for structuring reforms. Also, as the probability of Greek departure from the EU currency union rises again, the eurozone’s fiscal crisis might develop into a tediously drawn-out condition that will take extensive amount of time and resources to cure.
In the meantime, both the United States and China are expecting a change of leadership by the end of year. Since this leaves little room to maneuver fiscal policy this year, the two countries are mainly depending on monetary policy to manage the economic slowdown. Once the new leaders are sworn in, expansionary fiscal policies will be adopted to boost the economy, which would make the recovery more visible in the second half of the next year.
However, there are many barriers ahead. Above all, the U.S. is determined to cut fiscal deficits and sovereign debts in the coming years and China might shift the focus of economic growth from speed to balance and equality under the new regime. For this reason, fiscal policies in the U.S. and China might not change so dramatically after all, and their effects limited.
The outlook is rather grim on the domestic front as well. In Korea, a new president will take office in February 2013, and the government would employ aggressive fiscal policies to buoy the economy. Their effects might be palpable by the second half of the year, the economy showing more solid growth by then.
However, many destabilizing factors remain such as household debts amounting to almost 1,000 trillion won, a protracted slump in real estate market, little improvement in social polarization and youth unemployment. Clearly there is no quick fix for these problems, and domestic consumption and investment are likely to recover rather slowly.
Combined together, these suggest that the Korean economy would probably do better next year, but only marginally so. The upward path of the economy would have a very mild slope. It is unlikely that the economy would quicken its pace to meet the growth potentials anytime soon. For these reasons, the KIF might not forecast an “upward movement” for the Korean economy this time. However, I’m hoping against hope that I’d be wrong and the Korean economy would make a swift recovery and stay lofty throughout the next year and beyond.