Economic Outlook for 2012
Changmock, Shin, SERI Quarterly
Economic outlook, global financial crisis, economic stimulus packages, fiscal debt crisis
CONCERNS OVER ANOTHER CRISIS LOOM
The world economy has shown rapid recovery since the 2008 global financial crisis. In particular, with US recovery becoming apparent in early 2011, international institutions have bolstered their positive outlook on the world economy.1 The faster-than-expected global economic recovery was mostly attributable to globallycoordinated economic stimulus measures. At the same time, however, the process of overcoming the crisis proved the rule that "there is no such thing as a free lunch." In the second half of 2011, negative side effects of the economic stimulus packages began to surface.
Due to massive fiscal spending to fight the crisis, developed countries have had to take on massive fiscal debt, furthering concerns about a new crisis. In fact, the fiscal debt crisis that erupted in southern European countries in 2010 has already been spreading through major developed countries. The sovereign credit rating of both the US and Japan was downgraded in August 2011. Against this backdrop, developed countries have adopted austerity measures to stem a new crisis, which has made the global outlook cloudier.
Emerging economies on the other hand have enjoyed a relatively robust recovery but now face an unexpected difficulty: rising inflation. Massive liquidity injected by developed countries has cascaded into emerging countries, pushing up inflationary pressure. In addition, the Middle Eastern political crisis and recent adverse weather events have ignited sharp runups in food and oil prices. Thus, emerging economies are tightening monetary policies to stifle inflationary pressure, risking a contraction in the domestic economy as a result.
In short, three years after the crisis, the global economy is facing a new crisis, mounting fiscal debt in developed countries. This has increased the possibility of slow long-term growth in the global economy, and in the Korean economy as well.
GLOBAL ECONOMIC OUTLOOK
The pace of global economic growth is likely to slow in 2011 and 2012. The global economy grew 4.9 percent in 2010, recovering from the financial crisis thanks to coordinated fiscal stimulus and quantitative easing by governments around the world, along with recovery in international financial markets and emerging economies.
However, the pace of growth will drop to 3.8 percent in 2011 and 3.5 percent in 2012. The global economy was particularly shocked by unexpected events like the Middle East crisis and the Tohoku earthquake in the first half. Entering into the second half, the global economy was on the verge of a fiscal crisis as the side effects of stimulus measures began surfacing. Low growth is expected in 2012 due to the fiscal crisis and the effects of austerity measures.
Advanced economies are likely to grow as low as 1.3 percent in 2012 due to the absence of effective growth engines. With the private sector yet to recover its resilience, the public sector's ability to boost the economy remains weak because of pressing need for belt-tightening measures.
Lackluster employment and delayed recovery in the housing market in the US are weighing down on private consumption. Worse yet, an aggressive stimulus plan will be difficult since it raises the possibility of a further downgrade of the nation's credit rating. Further quantitative easing offers some small hope, but its effectiveness has not yet been proven. In light of all of these factors, the US economy is predicted to expand by a meager 1.3 percent in 2012.
Europe is in even worse shape. Following the southern European countries, France and Germany plan to tighten their belts in earnest. Lingering anxiety from the fiscal crisis will continue to aggravate the credit crunch in the region. With efforts to restore fiscal soundness eroding growth potential, the eurozone economy is expected to grow a modest 0. …