(EDITORIAL from the Korea Herald on June 11)

On the watershed

The Organization for Economic Cooperation and Development has recently predicted
Korea will be among the countries to recover fastest from the global economic
crisis.

The forecast by the Paris-based club of well-to-do nations may not be far off the
mark, given rapid improvements in economic indicators.
One of the most reliable guides in determining which direction the economy will
move in the months ahead is the composite index of 10 leading indicators. This
composite index rose 1.6 percent from the previous month to reach 114.7 in April,
the highest since May 2008 when the index was 115.
Still better, all 10 components of the composite index turned positive in April,
unlike in the previous month when three pointed south. No wonder economic
policymakers are more confident that the Korean economy will gain greater
momentum in the second half.
Finance Minister Yoon Jeung-hyun told a Japanese daily several days ago that if
the economic indicators continued to improve in the second quarter, they would
serve as evidence that the Korean economy had bottomed out. He said the economy,
whose decline had slowed, would become robust again in the final quarter of this
year or the first quarter of next year.
The finance minister's confidence is shared by some economic think tanks, which
are revising their economic outlook for Korea upwards.
Among them is the LG Economic Research Institute, which says it cannot be ruled
out that the Korean economy will have grown more than 2 percent from the first
quarter to the second quarter. Another think tank says it is revising the second
quarter growth from 1.3 percent to 2 percent.
Nonetheless, few could claim the Korean economy has a firm footing for an early
recovery. On the contrary, it is the easy monetary policy and the fiscal stimulus
that have been propping up the economy, which was badly shaken by the global
financial crisis. It has a long way to go until it gets back on track for
sustainable growth.
Moreover, obstacles to growth abound. They range from incipient union protests
and saber-rattling by North Korea to rising oil prices and the strengthening
Korean currency. To boost domestic demand, exports and employment against this
backdrop will be nothing short of a Herculean task.
But all these problems are dwarfed by the specter of inflation, which economic
experts are warning will come as soon as recovery goes into full swing.
At present, prices remain stable. The consumer price index fell to 2.7 percent in
May, the lowest since September 2007 when the index was 2.3 percent. But this
should not fool anyone. Rising prices of domestic public services and commodities
in the world market are a cause for great concern.
More worrisome is the liquidity that is abundantly available in the market as a
consequence of a massive fiscal stimulus package. It will fuel inflation when the
recovery starts. The financial markets are already reacting to such inflationary
expectations, as evidenced by the widening spread between 10-year treasury notes
and inflation-indexed bonds.
Of course, the threat of post-crisis inflation is not limited to Korea. Instead,
it will be a serious global problem as the managing director of the International
Monetary Fund recently pointed out.
"The risk of rapid inflation at the end of the recession is a real risk," he
warned. "It is not too early to think about what the world looks like at the end
of the crisis."
The Korean economy is now at a watershed. Top economic policymakers must be
prepared to take anti-inflationary action the moment the economy starts to feel
inflationary pressure as it recovers from the crisis.
(END)