World Economic Outlook for 2003

Ñ War with Iraq and oil prices = Developments about a possible war on Iraq are the most uncertain. According to the most prevailing scenario, the US will start military strikes on Iraq in the first quarter next year and make the nation collapse in three months. If the US controls the supply of Iraqi oil and increases the supply of Saudi Arabian oil to curb skyrocketing oil prices at the initial stage of the war, it could have a positive impact on the world economy. However, if the war continues for a long period of time, public opinions could become in favor of Iraq, raising a possibility of the US war ending in failure.

When it comes to oil prices, also political situations in Venezuela and the Organization of the Petroleum Exporting Countries` moves to reduce oil production should be considered.

Ñ Worldwide Deflation = With the German economy showing the possibility of deflation following the footsteps of the Japanese economy, the specter of the Depression in the 1930s is haunting the world again. A vicious circle, in which price drop leads to a reduction in incomes, and in turn it results in a decrease in consumption, thereby causing the price decrease, could lead to stagflation, which hit the world in the 1970s, with the bad news of shooting-up oil prices.

Korean economic research institutions estimate the possibility of deflation starting in the US is very low. However, as the real estate bubble is collapsing, the stock market has not bottomed out yet and consumer spending is very low, the US Fed`s large-scale rate cut of 1.25 percentage points has failed to pay off. Amid inflation concern among other EU members, Germany has not cut its interest rates, so the worry is that it could not avoid deflation pressure for a while.

Ñ Sense of urgency in the Japanese economy and revaluation of the yuan = Economic experts are perplexed that there is not way out, though they see the possibility of the Japanese economy`s sudden collapse is low. The stickiest issue is about disposal of bad debts worth 135 trillion yen as of March. If the North Korean nuclear issues become worse, deflation pressure on Japan is likely to increase.

The Japanese government`s answer to this is a weaker yen. The government attempts to expand exports by reducing the yen value to 150-160 yen against one dollar. In addition to this, in effect, the revaluation of the yuan, which is currently pegged to the US dollar at 8.27 yuan per US dollar, is needed. Though the Chinese central bank hews to “never changing the current rate,” there is a view that it is a matter of time before China revaluates its currency, given that the nation joined the WTO and its trade surplus continues to rise.

Rae-Jeong Park ecopark@donga.com