SEOUL, KOREA --- Despite the recent death of the former North Korean leader Kim Jong-il, private economic research institutes as well as the Bank of Korea are not planning to make any sudden modifications regarding their economic forecast for next year. They have decided that the short-term macroeconomic indicators will not change much, although the economic indicators staggered temporarily. In fact, these institutions consider European financial crisis as a bigger problem.
According to the 2010 World Economic Forecast Report published by LG Economic Research Institute (president: Kim Joo-hyung) on December 20, the uncertainty of the global financial market will continue for some time and developed countries are planning on cutting public expenditure to regulate the finance, which will result in slowing down the growth of world economy in 2012.
Current situation in the world economy
The institute analyzed that the world economy, which had been recovering at a rapid pace after the latest global financial crisis in 2008, has been on the downfall since the beginning of 2011. During the first half of the year, the external shocks such the Middle East crisis and Japanese earthquake exacerbated the inflation around the world and hampered the production rate. Even though the inflation was alleviated and production began to stabilize in the latter half of 2011, the institute explained that the financial crisis in Europe has spread over many developed nations in the form of debt crisis, making it difficult to recover overall demands. In contrast to the five percent growth rate of world economy in 2010, the number dropped to around three percent in 2011.
The institute predicts that the downtrend of world economy will continue for the future, as the uncertainty of the global financial market will not easily disappear. In the year 2012, according to its expectations, the debt that had been accumulated since mid-2000s will began to be adjusted as household debts in developed countries have been somewhat accommodated after the global financial crisis.
Demand will shrink in other countries as well, the institute says, through commodities trading and cash flow. Growth rate of the world economy in 2012 is expected to be 3.3 percent, which is slightly lower than that of 2011. Ailing economy in general can also aggravate tension between countries. In Europe, austerity measures, imposed on top of high unemployment rate, might even lead to societal dismay. The report added that the efforts to increase external demand can reignite international conflicts involving foreign exchange rate and trade.
Concerns about double-dip recession in the US are somewhat relieved
LGERI says, “the recent economic indicators in the US seems to improve, thereby raising expectations for the future recovery”. As overall consumer appeal has risen, retail sales and production has increased, consequently putting a break on escalating unemployment rate.
Such improvements were made possible as stabilized oil price eased inflation and automobile manufacture resumed after the latest earthquake in Japan. Increasing consumer price has begun to turn downwards since last October, enhancing real purchasing power of households. Furthermore, car sales have been improving rapidly since September as well. Car sales contributed nearly 40 percent to the increased retail sales in the US last September and October. Such rebound boosted consumer sentiment index that plummeted in August.
The research institute believes that the concerns of double-dip recession has been relieved as the US somewhat recovered from the shock of credit rate downgrade in August. With lowered inflation pressure, US now has room to implement quantitative easing for the third time. Home sales are gradually increasing thanks to the house prices that have fallen by 30 percent from the highest point as well as low interest rates. Although house prices are likely to continue to fall for a while as seized properties remain for sale, the majority of experts expect the downtrend to stop in 2012.
The US and Japan have difficulty leading the world economy
According to the report, in order for the economic rebound to gain momentum, the world economy needs a virtuous circle in which increased consumption leads to more employment and investment, and consequently, higher income.
Savings rates in the US dropped to 3.5 percent– significantly low in comparison to over 5 percent in 2010 - as the consumption increased while the real income did not. However, the government sector will continue to slow down its real businesses with the budget cuts plan while the sales in export declined. The US economy will, the institute says, continuously fluctuate, and maintain the growth rate at around one percent.
The report also predicts that Japan, too, will not be able to contribute much to the growth of world economy despite the expected recovery of demand in the wake of the earthquake; the restoration exacerbated the national debt, which is already high, thereby hindering economic recovery. The national debt of Japan currently amounts to 220 percent of the GDP, and if the concerns about Japan’s credibility rise, expenditure on earthquake recovery can be constrained as well.
Furthermore, higher price of yen due to financial crisis in the US and Europe will pose an obstacle to the country’s economic recovery. The institute expects Japanese economy to grow by around two percent in 2012, but adds that this is not a proper rebound given the negative growth in 2011.
Alleviated austerity measures will help China defend 8 percent of growth rate
The institute reports that “China showed visibly slower growth during the second half of 2011 because of austerity measures taken to suppress soaring prices". Rapid rise of food prices resulted in high annual inflation rate of 5 to 6 percent. Economic downturn of developed countries also reduced the export and the growth rate of the third quarter dropped to about 7 percent in comparison to that of the previous quarter. According to the institute, “the slowdown of exports in China will continue this year as well”, as 18 percent of Chinese exports depend on Europe and, therefore, the country will be heavily affected by the financial crisis.
Nonetheless, as the prices are stabilizing and real estate prices seem to have stopped rising recently, Chinese government will most likely relieve austerity. Given the high growth rates between 9 and 10 percent for the last few years, if the number falls below eight percent, Chinese economy will face a great shock. The government, however, will try to keep the growth rate above 8 percent at least to prevent the rise of unemployment rates and social instability that can follow, according to the institute. The report concludes that, considering the relatively low national debt – 27 percent of the country’s GDP – and secure foreign exchange reserves, China will be able to relieve austerity in 2012.