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Is plummeting stock markets a sign of economic crisis?

Posted October. 13, 2018 07:47,   

Updated October. 13, 2018 07:47


The U.S. and European financial markets have been driven downward over the past two days. On Thursday (local time), the New York stock market saw a drop in two consecutive days with the Dow Jones Industrial Average down by 2.13 percent. Other major markets including London, Paris, and Frankfurt went down by almost 2 percent, as well. On the other hand, the Asian stock markets, which nosedived along with the other regions on Wednesday, rallied to sit in stable state. On the same day, the Korea Stock Price Index (KOSPI) increased by 1.51 percent, which, however, does not guarantee optimism because of a growing trend of coupling across the global financial market.

The U.S.-driven decreases in stock prices across the globe are mainly due to the U.S. interest rate hike. However, if you take a closer look at the causes, a combination of problems are lurking in the shadows such as financially hit emerging markets, the trading war between Washington and Beijing, and poorly performing global tech giants. Even with ups and downs across the emerging market, the U.S. economy has been considered “goldilocks,” for which critics are raising their worried voices. As recently as 20 years ago, when the Asian financial crisis occurred, emerging economies only accounted for 43 percent of the global market while, as of now, they take up 59 percent. This implies that a crisis in the emerging market is more likely to infect advanced economies than before.

Concerns have increased that the current developments are a prelude to a global recession. Rumor has it that China can suffer a financial crisis. Also, global tech giants that have led the U.S. economy, such as Facebook, Apple, Amazon, Netflix and Google, are also struggling with their decreasing stock prices. It is mainly because of lowered investment expectations over the 4th industrial revolution and IT industry. It can be a signal that businesses should reinvent themselves to set their path to new growth engines. Korean companies are not an exception.

A dwindling global economy can deal a critical blow to the Korean economy, which is an export-driven, small-scale open market. It only is a beginning of crisis that investors pull out of the country’s stock market and the exchange rates are unstable. If such negative factors come to impact the real economy, a strong growth will be a far cry from a reality. What’s worse, the IMF lowered Tuesday this year’s prospected growth of the Korean economy from 3 percent to 2.8 percent. No one is sure of realizing the projected figure, however.

Externally, trading conflicts and fluctuating exchange rates threaten the Korean economy. Internally, there are alarming sounds from investment, consumption and employment indexes. Each industrial sector is also shadowed by gloomy projections. Some experts even say that next year will see an end to the booming era of the semiconductor industry, which has solely sustained the Korean economy so far.

Worryingly, it is questionable whether or not the Korean government is committed to supporting Korean businesses in an ever-increasing competition, given its policy packages. The key lies in increasing productivity by reforming the labor market and encouraging businesses to invest in new areas by innovating regulation. Preemptive restructuring efforts can improve the economic fundamentals to boost industrial competitiveness over the long term, which is all about helping businesses contribute to the economy.