[Editorial] Preparation for Economic Recession Needed

With the impending change in administration, the will and passion to “do it again” have been rekindled in all corners of society, including the business circle. But the economy has remained cloudy since early this year. The central Bank of Korea announced yesterday that the February business survey index in manufacturing fell for the fifth straight month. This means more businesses expect the economy to worsen. The indexes for large companies and exporters, which led the economy until last year, dropped even more. The situation is especially gloomy in key industries such as cars, shipbuilding and communication. The financial sector is pitch dark due to the shock in world stock markets in the wake of the U.S. subprime mortgage crisis.

The U.S. Fed cut interest rates twice in January, but this apparently cannot prevent a recession. The International Monetary Fund downgraded its world economic growth forecast from 4.4 percent to 4.1 percent. The Bank of Korea says the Korean economy will grow 4.7 percent this year, but this is seen as difficult. China expects growth of 10.5 percent this year, down from 11.5 percent last year. Some forecasts, however, say Chinese growth could drop to single digits. This is bad news for Korea, which heavily relies on China as an export market.

The Lee Myung-bak administration’s growth target for this year is six percent, down from its pledge of seven percent a year. But this is only possible if conditions in and out of the country help. More important than the growth rate is what is embodied in the growth. Sluggish domestic demand worsened consumer sentiment to a new low under the Roh Moo-hyun administration, regardless of the growth rate or macroeconomic indexes. When exports and large enterprises shrink, both economic indexes and consumer sentiment worsen.

Though the new government can focus on smooth progress in macroeconomics, it should not to be carefree on economic stimulus policies. The Roh administration proudly says it made “no artificial economic stimulus,” but this is just another way of saying it lacked the ability to deploy effective measures. All policies are artificial and carry side effects. When a recession is predicted, the government must take bold measures to minimize the shock. That could be an important measure for the people. The government should not hide behind the excuse that the entire world economy was going down as a whole.

With the new president, investment moods are expected to change, but this does not guarantee recovery in business investment. The new government should quickly implement deregulation and tax reform. The Bank of Korea must also consider cutting interest rates as part of stimulus measures, now that the rates of Korea and the United States are reversed.