Global economies shift policy focus from inflation to growth

Barely three years after the 2008 financial crisis, the global economy is slipping back into recession, prompting countries to abandon fiscal austerity and switch to economic stimulus.

The U.S., the origin of the crisis, has put forth a massive economic stimulus package while European and emerging economies have held their benchmark interest rates steady.

Analysts are skeptical, however, that these efforts can rescue the global economy. Advanced economies have exhausted nearly all of their stimulus alternatives, while the looming global currency war is hampering international cooperation essential for boosting the global economy.

Korea is also facing the classic dilemma of having to choose between growth and inflation.

○ Switch to economic stimulus measures

The European Central Bank froze its key interest rate at 1.5 percent Thursday for the second straight month in a move considered the end of a recent cycle of monetary tightening.

In addition, emerging economies have either left their key rates unchanged or lowered them. Australia froze its interest rate Tuesday despite high inflation due to the influx of foreign capital from resource exports. A week earlier, Brazil cut its base rate for the first time in 23 months for the sake of growth, sacrificing inflation (nearly 7 percent).

In the U.S., President Obama proposed a jobs stimulus plan Thursday worth 447 billion dollars, and the U.S. Federal Reserve is set to announce a massive dosage of stimulus packages at its next meeting on Sept. 20-21.

Countries are shifting their policy focus to growth from inflation because the global economy is stumbling. The Organization of Economic Cooperation and Development slashed its growth forecast for the U.S. to 0.4 percent for the fourth quarter this year, down from 3 percent in May.

The Paris-based group of advanced economies also expected the economies of Japan, France and the U.K. to grow no higher than 0.3 percent in the fourth quarter and for Germany`s to shrink 1.4 percent.

Advanced economies are also bracing themselves for a joint collaboration to boost the global economy. The first effort will come Friday at the G-7 meeting of financial ministers and central bankers in France, followed by the International Monetary Fund`s annual meeting and G-20 convention of financial ministers and central bankers in Washington on Sept. 23.

Among the agenda to be discussed here are stimulus measures and ways to control the pace of fiscal tightening. Since they are suffering from a severe fiscal crisis, advanced economies are likely to demand that emerging economies help shoulder the stimulus burden.

U.S. Treasury Secretary Timothy Geithner urged Thursday China to strengthen domestic demand and let the yuan appreciate.

Critics, however, are skeptical that joint cooperation will succeed since emerging economies are also suffering the pinch. In China, consumer inflation exceeded 3 percent in August for the third month and its real economic indicators are also performing worse than expected.

Switzerland and Japan are moving aggressively to depreciate their currencies, which is an underlying cause for global conflicts over currency.

○ Korean economy in dilemma

The global policy shift to growth will increase international pressure on Korea. Korea’s foreign liabilities relative to gross domestic product is 35.1 percent, far lower than the OECD average of 102.4 percent. This gives much room for Korea to promote economic stimulus measures.

The government and the Bank of Korea are shifting their policy focus to growth from inflation control. The central bank froze its benchmark interest rate for the third straight month on Thursday despite high inflation.

Korea, however, cannot actively join global cooperation for economic stimulus. The government expects inflation to slow this month but keeping it at the 4-percent level this year will be challenging.

President Lee Myung-bak set fiscal stability as major policy for the second half of his term, foreshadowing difficulty in implementing aggressive fiscal expansionary measures. Korea faces the dilemma of pursuing economic stimulus in line with international coordination and maintaining a tightening policy for the sake of fiscal soundness.

Lim Hui-jeong, a research fellow at Hyundai Economic Research Institute, said, “Though consumer inflation will slow from September, keeping it at the 4-percent level this year will still be challenging. The government will face even a bigger dilemma of having to choose between growth and inflation when international collaboration meetings begin.”

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