Outlook for global economy bright in 2010

The world has experienced the greatest economic disaster in recent memory and we should not be mistaken about the uncertainties still facing the global economy.

However, given the clear pace of recovery being observed around the world, the overall outlook for the global economy looks bright for 2010.

The United States has recorded positive growth of 2.2 percent in the third quarter of 2009, the first in five quarters, owing to such active expansionary measures as the "Cash for Clunkers" program, aggressive lowering of interest rates and various Troubled Asset Relief Programs. Euro-zone and Japan also recorded positive growth relative to the previous quarter, though the pace of recovery was modest.



Faster recovery in

emerging markets

It should be noted that the pace of recovery in emerging and developing economies far outstripped that of advanced nations. The consumer growth rate in China rose by 15 percent, with similarly high growth in production and investments, allowing China to grow by 9 percent compared to the same period in 2008. India`s expansionary measures also bore fruit, allowing the world`s largest democracy to grow by 7.9 percent for the third quarter of 2009 and nearly match China in terms of growth rate. The Association of East Asian Nations, or ASEAN, is also recovering rapidly after hitting bottom in the first quarter of 2009, buoyed by normalization of their international trade and robust growth on the part of China.



With the economic situation in a general upswing around the world, the global economy is expected to recover slowly in 2010 and maintain a pace of modest growth. Major economic agencies have estimated a growth rate higher than 3 percent for the global economy in 2010, with the International Monetary Fund and the Organization for Economic Cooperation and Development predicting growth rates of 3.1 percent and 3.4 percent, respectively. A slower pace of recovery, around 1 percent or so, is foreseen for advanced economies, while emerging and developing economies will post a brisk pace in excess of 5 percent on the road to full recovery. The fastest pace of recovery among the world`s regions will most likely be seen in Asia.

A world economy on the rise again will lead to a rebound in global trade, which dropped precipitously during the last financial crisis. Most rapid recovery is likely to happen in emerging and developing economies and especially those economies in Asia.



Cautions against

unbridled optimism

In spite of positive indicators and forecasts concerning growth rates and rebounding trade, there are still questions about the world economy that cautions us against unbridled optimism.

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High rates of unemployment in advanced economies like the United States, Europe and Japan; and concomitant decreases in income and slow recovery in private consumption, will mean slow growth as well as painfully slow increases in imports.

In the case of the United States, there are issues of household debt and potential insolvency in commercial real-estate loans. As for Europe, faulty state finances leading to renewed financial insolvency remains the biggest concern, not to mention high government budget deficits amounting to over 6 percent of total GDP that may become a huge roadblock to future recovery. In Japan, a decrease in private investment in addition to government debt double the size of the GDP (219 percent in 2009), along with deflation, remain unsolved issues and it is reasonable to assume that low growth will be the prevailing condition in Japan.

Even in China, showing the most rapid pace of growth in the world, there is cause for concern - the most visible being 870 million yuan in new loans that exceeds the government ceiling by a wide margin, in addition to liquidity increase of 28 percent up until the third quarter of 2009 - meaning China will encounter difficulties in maintaining its expansionary policies.

To sum everything up, official expansionary policies that have been the main vehicles for recovery this year are approaching their limits due to fiscal unsoundness created by those policies, which would mean that continuation of expansionary monetary policies is highly unlikely. There is also a possibility that rising unemployment and savings rate coupled with decreased private consumption following the cessation of expansionary policies would come together to pull the major economies down again into a double-dip recession in 2010.



Foreign exchange market and current account balance

Concerning foreign exchange rates, the still-weak dollar in the first quarter of 2010 is expected become strong in the following quarters because the U.S. recovery will be more robust than Europe or Japan. The exchange rate between the yuan and the dollar is likely to appreciate as a result of revaluation pressures from the United States and other advanced economies to redress the global imbalance, but the appreciation is expected to be modest. Coming back to Korea, the value of the Korean won is expected to rise against the dollar due to rapid economic recovery and maintenance of its positive current accounts balance. However, a shrinking current account surplus combined with a strong dollar worldwide will ensure that the margin of increase will not be great.



Interest rates and oil prices

The outlook on interest rates by most bond experts in major financial institutions is that the rates in major economies will be raised during the latter half of 2010 when patterns of recovery become unambiguous, with the exception of Japan, currently experiencing acute deflation problems. Raising interest rates will have a huge impact on short-term rates, possibly reducing the rate gap between long and short-term rates, as the rise in long-term rates as a result of the policy rate raises will be smaller than that for short-term rates due to the easing of the credit crunch.

Most oil price forecasting agencies do not expect the rise in demand for energy to be markedly high in 2010, due to a moderate pace of recovery around the world and restrictions on carbon emissions, with most forecasts placing the price of oil within a range of $65-$80 per barrel. But the situation may change expectedly, with sudden spikes in demand from rapidly-growing emerging economies, as well as the possibility of increasing investment in oil and related products in case the value of the dollar continues to fall. In the last scenario, should the deteriorating supply and demand situation dovetail with the weak dollar, there is a chance that the price of oil could rise to an average of $90 per barrel.

All in all, there are still unpredictable variables that will remain in the world economy in 2010 and the possibility of a mild recession during the adjustment of economic policies in the major economies cannot altogether be ruled out. However, given the current pace of recovery, it is generally presumed that the world economy will maintain a pattern of modest growth in 2010, barring an unforeseen catastrophe.

By Chae Wook