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The Dow Jones Industrial Average closed down 2.64 percent or 366.94 points at the New York Stock Exchange on Friday, continuing five consecutive days of declines. And in international oil markets, the price of West Texas Intermediate surged above $90 a barrel at one point, while Dubai crude hit a record high of $79.59.
The drop in U.S. stock prices and the surge in oil prices are reflections of two major uncertainties the global economy is facing. One is a U.S. economic slowdown and the other is rising inflation due to increases in raw materials prices. Dark clouds of inflation and economic slowdown are forming over the skies of the global economy, which has been enjoying a period of ¡°goldilocks¡± prosperity over the last several years with high growth without inflation.
The International Monetary Fund lowered its forecast for 2008 U.S. economic growth to 1.9 percent -- that¡¯s 0.9 percentage point lower than the 2.8 percent growth the IMF had predicted in July for the world¡¯s largest economy. The IMF said a possible depression risk has increased, including a dampening in consumer spending due to a drop in housing prices. Due to uncertainties over the U.S. economy, $163 billion of foreign capital left that country in August alone, weakening the value of the greenback. If the U.S. economy sinks, then the international financial market becomes troubled by uncertainties and this creates huge ripples that affect the world¡¯s economies.
The rise in oil, grain and raw materials prices is also a cause for concern. There are predictions that we may soon see oil prices rise to more than $100 a barrel. Prices of corn rose 35 percent in a year, while soybean prices have risen 72 percent. Prices of non-ferrous metals such as copper and zinc have soared to record highs as well. It has now become difficult to enjoy the ¡°China effect¡±, which has been easing inflationary pressures over the last few years by supplying global markets with low-priced goods. That¡¯s because inflation rate in China shot to the 6-percent range.
Bank of Korea Governor Lee Seong-tae said if global oil prices hover in the $90 range for a year, then consumer prices will rise between 0.4 to 0.5 percentage points, while economic growth could fall by 0.4 to 0.5 points. And the impact could be amplified when weakened exports due to the economic slowdown in the U.S. and other advanced countries combine with the effects of rising commodities and raw materials prices. Yet our economy is being left unattended like an orphan before these rough waves.
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