ed Looming economic woes

Addressing external downside risks needed

External downside risks such as Greece’s possible exit from the eurozone and international sanctions against Iran have emerged as major stumbling blocks to the Korean economy, making the economic outlook increasingly uncertain.

In particular, forecasts for the country’s economic growth have been readjusted downward continuously, heightening anxiety among policymakers and businesses.

The Organization for Economic Cooperation and Development (OECD) Tuesday lowered its 2012 growth forecast for Korea to 3.3 percent, down from the 3.5 percent it forecast in April.

Earlier, the Korea Development Institute also lowered Korea’s growth estimate to 3.6 percent and the International Monetary Fund set its growth forecast at 3.5 percent.

The recent string of downward readjustments stems largely from external downside risks that can’t be managed by Korea alone. Minister of Strategy and Finance Bahk Jae-wan Wednesday admitted that the Korean economy is faced with increasing uncertainty due to the eurozone crisis and other external downside risks, noting that external uncertainties have disrupted the steady pace of the country’s economic recovery.

It’s disappointing to see the government’s earlier expectations for a recovery in the second half of this year go astray. Earlier this year, the government said the economy will remain sluggish until the end of June but will show a major upturn in the second half. At the time, Korean policymakers anticipated Europe’s debt woes to ease a bit and oil prices to stabilize at around $100 per barrel.

But their expectations evaporated. The eurozone situation is going from bad to worse since anti-austerity forces took power in Greece and France and challenged frugal policies orchestrated by Germany. If Greece’s exit from the eurozone becomes a reality, its impact on the global economy as well as the Korean one will be immeasurable.

The specter of higher oil prices may also haunt the nation if talks to settle Iran’s nuclear weapons development program fail. Some pessimists predict a price of $160 a barrel but crude prices will go back to $120, as seen in the first quarter, in the event that the Iranian situation worsens.

As one of Korea’s internal downside risks, the OECD cited household debt that swelled to about 912 trillion won recently. Nearly 400 trillion won of the debt is home-backed loans that could easily become insolvent in a time of economic crisis. We are fearful of a vicious cycle of rising debt, slowdown in consumption and soaring unemployment. To our relief, prospects for inflation are relatively bright.

Of course, there are upside factors. The Korea-U.S. free trade agreement is expected to boost exports to the United States and this will boost the percentage of current account surpluses in gross domestic product from 1.3 to 1.5 percent.

To cope with the latest challenges, the government should act decisively, relying on its expertise accumulated during two economic crises in the late 1990s and 2008. Specifically, preemptive macroeconomic measures, including raising the key policy rate, should be among the government’s major policy tools.