If you’re looking for signs the world economy is bottoming out, South Korea could be the place.
It’s entirely possible things will get worse globally. Recessions may deepen, asset prices may slide further and credit markets may remain locked up. Doomsayers like Nouriel Roubini still make plausible arguments that things will just get nastier.
Amid such risks, hints that the Bank of Korea’s most aggressive round of interest rate cuts in a decade is coming to an end are a rare ray of sunlight. Among developed economies, Korea’s was arguably the first sent into freefall by the global crisis. Iceland got more headlines, yet as the world’s 13th largest economy, South Korea is one that really matters.
Signs that Korea’s deepest contraction in more than a decade is abating could be a harbinger of a more stable world economy. Not yet vibrant growth, still, after 18 months of plunging stocks and household panic, a steadier Korea would indeed be a positive development. The reason: it would have significance not only in Seoul, but 7,000 miles away in New York.
It really is hard to think of an economy that went from growth to crisis faster than South Korea. It was the first nation to rebound from Asia’s 1997-1998 financial crisis. In late 2008, Korean officials found themselves shooting down speculation their economy would again cascade into chaos. Today, there’s far less chatter about Korea going the way of Iceland.
Risks abound, of course. South Korea’s vulnerability was painfully apparent after the failure of Lehman Brothers Holdings Inc. The U.S. and Japanese recessions are far from over. Korea’s ability to export its way back to health is very limited. And North Korea’s recent rocket launch added a new layer of geopolitical risk.
Protesters forced the cancellation of a weekend meeting of Asian leaders in Pattaya, Thailand. That would have been a rare opportunity for Korea, Japan, China and other regional powers to cooperate to stem the global crisis.
South Korea’s central bank governor, Lee Seong Tae, made a significant observation last week: the pace of Korea’s slowdown “moderated significantly” since the bank’s February meeting. Policy makers last week left the benchmark rate unchanged for a second month. Also, factory output gained for a second month in February and manufacturer confidence rose to a five-month high.
Such data dovetail with some tentative signs that the U.S. may be nearing a bottom. Asian stocks were buoyed when U.S. first-time claims for unemployment insurance fell 20,000 in the most recent report and as Wells Fargo & Co. reported a record quarterly profit.
A Little Optimism
White House chief economic adviser Lawrence Summers said conditions have eased in credit markets and voiced confidence that the slide in U.S. growth will end within the next few months. Federal Reserve Bank of Kansas City President Thomas Hoenig said government stress tests of banks will probably indicate most don’t need more taxpayer money. U.S. President Barack Obama said he’s “starting to see progress” toward a recovering economy.
Again, it’s all tentative and subject to big and sudden surprises. If you had $1 for every time in the past two years a pundit said “this is the bottom,” you could probably open your own hedge fund. Yet unlike two months ago, there’s actually some comforting news to be found about the global economy.
Korea is a case in point.
“An economic recovery will be very slow,” Kim Jae Chun, director general at the central bank, said last week. And yet after the turbulence and fear of the last couple of years, that sounds pretty good. Think about it. Two years ago, investors would have been aghast at the idea of an L-shaped global recovery. Today, many would gladly welcome one.
Asian governments need to learn how to live for a while with 1 percent or 2 percent growth -- not the usual 6 percent or 7 percent. That transition will be as difficult for Korea as anywhere. In December, the central bank predicted 2 percent growth in 2009. It now expects a 2.4 percent contraction.
Still, I never bought into the view that Korea was the basket case many claimed. Last week’s bond sale should shelve talk of short-term liquidity or balance of payments shock. South Korea sold $3 billion of dollar-denominated bonds overseas to bolster the won. It’s good news for credit markets from Seoul to New York that Korea attracted orders for more than double that amount.
As Asian Development Bank President Haruhiko Kuroda told me in Manila recently, Asia learned a lot from its crisis. Improvements in financial sectors since then are paying off amid the current global meltdown.
Cash, Credit, Jobs
Governments also are acting more quickly to stabilize growth. South Korea’s most recent plan, for example, spends 17.7 trillion won ($13 billion) on cash handouts, cheap loans and job training to revive things.
Japan’s record 15.4 trillion yen ($154 billion) stimulus plan is worth considering here. So are Japan’s previous packages and China’s 4 trillion yuan ($585 billion) plan. That means Asia’s two biggest financial powers are tossing a combined $835 billion at their economies.
It’s a positive development for world growth. Events in Seoul may offer an early indication that such steps are paying off and that it’s time to buy the Dow Jones Industrial Average.