(EDITORIAL from the Korea Herald on July 30) - A matter of timing

The Korean economy is showing signs of renewed vitality and, at the same time,
consumer confidence is being restored as optimists outnumber pessimists. There is
no arguing that the ailing economy is recovering fast from the worst global
economic crisis since the Great Depression.
Yet no consensus is emerging on when to wean the economy from the stimulus
package and let it stand on its own. Some economic think tanks suggest that the
government start implementing an exit strategy in the near future, if not now.
But the government insists it is too early to consider changing course.
At the heart of controversy is whether or not the nascent recovery is durable
enough for the government to phase out stimulus policies soon. If so, the
government will have to take action to prevent liquidity from flooding the market
and building up inflationary pressure. If the recovery is deemed too feeble, the
government will have to keep interest rates low and maintain a high level of
spending.
At the outset of this year, the government determined the economy would contract
2 percent in 2009. But when it announced the second-half economic management plan
last month, the government revised its year-on-year forecast, cutting the 2009
fall in gross domestic product to 1.5 percent.
The upward revision was based on the second-quarter performance, which was better
than expected. The rate of growth from the first quarter was at 2.3 percent, up
from the earlier forecast of 1.7 percent. It was the highest since the final
quarter of 2003.
Top economic policymakers are undoubtedly happy with the robust recovery. Still,
they have good reason to have reservations. They have a growing fear that it will
be followed by zero growth in the third quarter.
Growth surged in the second quarter, instead of dissipating - the government had
anticipated that there would be 1.7 percent in the second quarter, and 1 percent
each in the third and final quarters. Now the government expects the
third-quarter growth will fall back to zero.
Growth momentum, it says, would fizzle out if the government and the central bank
tightened their respective fiscal and monetary policies now. Its fears are not
beyond comprehension, given that it does not have much to spend in the second
half because it spent 60 percent of the budget in the first half under its
frontloading policy.
The government says it will stay the course until after the private sector picks
up the tab. But it believes it will take time before consumers keep their purses
open and corporations resume active investments.
Nonetheless, the government-funded Korea Development Institute has recently
recommended that the government, together with the central bank, prepare to
discontinue stimulus policies one after another in the near future.
The KDI has good reason to advise caution. Though consumer prices remain stable
at the moment, the property markets are already showing signs of overheating in
Gangnam and other residential areas designated by the government as
speculation-prone zones.
Apparently, the KDI believes it will be too late if the government takes
anti-inflationary action when the economy enters a full recovery. By that time,
an inflationary spiral may have been set in motion. As such, the research
institute maintains that the government will have to be prepared to take
preemptive action.
No harm will be done to the economy if action plans are put in place. The
government and the central bank will do well to develop fiscal and monetary
policies designed to put incipient inflation in check. To put them to use will be
a matter of timing, given the enormous amount of liquidity pumped into the market
to fight the crisis.
(END)