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Is the Worst Over in the Global Economic Crisis?

Posted August. 08, 2009 08:04,   


With the property market and real economy indicators showing notable improvement, consensus is growing that the global economy will not worsen further despite varying opinions on the pace of recovery.

The financial meltdown last year was called a “once-in-a-century crisis,” yet many wonder how recovery signs have arrived less than a year after the outbreak of the crisis.

○ Signs of recovery in real economy

The crisis is believed to have ended to some extent in the global financial market in April and May, when world property markets and stocks began rebounding. That means governments and financial institutions avoided contingencies such as a liquidity crisis and falling share prices around that time.

Close cooperation among governments has played a pivotal role in beating the financial crisis. At the end of last year, countries announced interest rate cuts and the Group of 20 summit in London discussed overcoming the crisis in April.

At the time, signs of recovery were seen in certain emerging economies including China, but the global economy remained sluggish.

Recently, however, the real economy has also shown signs of recovery across the world. A gauge of U.S. housing prices is a case in point. Late last month, S&P announced that the home price index rose 0.5 percent in May from the prior month in 20 large U.S. cities, the first gain since July 2006. American media welcomed the news, saying falling home prices responsible for the crisis were finally stabilizing.

Moreover, the U.S. economy declined a mere one percent in the second quarter, far better than expected and raising expectations of economic recovery. Moody’s and UBS also upgraded their second-half outlooks for the U.S. economy.

Japan, whose economy has been hit hardest by the crisis, has shown signs of a rebound. In the second quarter, its industrial production index jumped 8.3 percent from the previous quarter to hit a new high since 1953.

The Japanese Finance Ministry also released rosy economic prospects, saying, “The economy is still in bad shape, but signs of recovery have appeared in several regions.”

In Europe, the manufacturers purchasing managers index has grown for five straight months. IHS Global Insight predicted that the European economy could begin growing before the end of the year, and as early as the third quarter.

○ Exaggerated panic calmed

Certain experts say the global economy has recovered due to unexpected reasons, claiming that the recent growth stems from extremely negative prospects released last year.

The Financial Times Wednesday ran a column saying that in response to the tremendous shock, companies excessively reduced inventories last year, and the recent recovery proves this was a grave mistake.

Expecting demand to fall sharply, companies at home and abroad cut production more than 20 percent from late last year to early this year. They are now rushing to raise their factories’ operating rates as consumer confidence has rebounded earlier than expected.

Due to mounting fears, companies and investors drastically cut their capacity and investment last year as the crisis appeared far worse than its predecessors.

Effective response and close cooperation among governments are also believed to have contributed to the fast recovery. In the early phase of the crisis, governments released coordinated monetary policies to prevent the global financial structure from collapsing.

Their economic stimulus packages have also been a great help. Jeon Min-gyu, an economist at Korea Investment Securities, said, “On the one hand, the recent economic recovery is ascribable to last year’s excessive panic. On the other hand, close cooperation by governments in adopting shock therapy, which would have been unimaginable in the past, accelerated world economic recovery.”

The rapid recovery of emerging economies such as China is also considered to have played a part in economic revival.

○ Skepticism over aftermath

Lee Chang-yong, the vice chairman of the Financial Services Commission, said, “The world economy is not expected to plummet further as fast as expected last year. Still, there are risk factors.”

Economists say the biggest risk factor is the fiscal condition of a government. Mounting fiscal deficits stand in the way of sustainable and rapid economic recovery. Though the global economy has bottomed out in the financial market and real economy, a return to the pre-crisis potential growth rate is implausible over the near term.

The International Monetary Fund predicted that fiscal deficits will account for 13.6 percent of U.S. GDP and 9.9 percent of Japan’s this year. The remaining challenges include the emergence of trade protectionism, weakening inter-governmental cooperation, and the possibility of another crisis stemming from commercial properties in the U.S. and Eastern Europe.

Park Hyeon–su, senior researcher at Samsung Economic Research Institute, said, “When the government has difficulty handling the fiscal deficit on its own, the private sector should share the burden.”

“Many economists are worried over this scenario. If stock prices grow excessively due to immoderate expectations in emerging economies such as Korea, it could hinder economic recovery.”

The Korea Center for International Finance cited American economists as saying the U.S. economy could slow down again in the first quarter next year if declining housing prices and growing unemployment cause consumption to fall.

They warned of a double-dip recession, in which an economy recovers to see a short period of growth but quickly goes back into recession.

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