The Korean economy is expected to undergo a highly uneven recovery as a toxic cocktail of rising inflation, high interest rates and a weakening Korean won are set to hamper growth in the second half of this year, according to analysts, Thursday.
What is of grave concern is that such an unfavorable environment comes as both households and companies are saddled with mounting debts, which they expect will put a damper on financial markets and hamper economic growth over time.
According to Statistics Korea, Thursday, the country’s Consumer Price Index (CPI) in September stood at 3.7 percent, compared to the same month last year. It is the largest increase since April, when monthly inflation reached 3.7 percent.
The increase in the consumer price index has slowed down, since it peaked in July last year posting a 6.3 percent jump year-on-year. The monthly inflation rate logged the lowest increase of 2.3 percent in July this year, but it started to speed up again since August.
Market watchers are wary over the threats from a combination of continuing high inflation, high foreign exchange rate and high interest rates. If the inflation rate does not be tamed during the remaining three months, it will end up surpassing the Bank of Korea (BOK)’s earlier price forecast of 3.5 percent set for this year.
“It is expected that Korea’s consumer price increase rate is nearing four percent by the end of the year, considering remaining inflation-inducing factors, such as slated increases of public transportation fares, dairy products,” Kim Ji-man, a senior analyst at Samsung Securities, pointed out.
Finance Minister Choo Kyung-ho speaks during an emergency meeting of economy-related ministers at the government complex in Seoul, Thursday. Yonhap
Increased interest rate gap between the U.S. and Korea is also unnerving the local market in the second half. The interest rate difference between the two countries has risen to 2 percentage points since July. As it’s been some 15 months since the U.S.’ interest rates have exceeded that of Korea, in addition to the U.S.’ possible further increase in the near future, concerns over capital outflow, weakened bond and stock market are growing.
Following signal by the U.S. Federal Reserve officials that the key rates could be kept higher for longer, yield on the 10-year U.S. Treasury note had climbed to the highest level in 16 years during Chuseok holidays here though it stabilized on Thursday.
“Due to prolonged U.S. monetary tightening, in the short-term, the local markets will become more sensitive to negative factors, such as rising loan interest rates linked to project financing (PF) and household debt, as well as the increased issuance of bank bonds. This could further aggravate market uncertainties, thus requiring active risk management in October,” Kim Ji-na, analyst at Eugene Investment, said.
Korea’s chronic burden in household debt is also dampening the economic outlook for the second half. According to IMF’s database, Korea’s household debt-to-GDP ratio rose to 108.1 percent in last year, marking the highest increase among 26 countries during the past five years. It is also the top second country in the world in terms of the household debt to national economy size, only following Switzerland with 130.6 percent.
Meanwhile, global oil prices plunged on Wednesday, U.S. time, reversing their price move, after hitting their highs of this year in last week. Front-month futures of West Texas Intermediate crude fell by 5.6 percent on Wednesday, posting the lowest settle since late August.
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Lingering external uncertainties
Deputy Prime Minister and Minister of Economy and Finance Choo Kyung-ho stressed that the government will not let its guard down and will focus on policies to foster economic recovery amid the increased external volatility and uncertainties stemming from prolonged high interest rates and economic slowdown in major countries.
Won-dollar rate has risen steeply recently though it closed down 13 won at 1,350.5 won per dollar on Thursday. It is still the record high since Nov. 23 when the rate stood at 1,351.8 won per dollar.
The government also plans to come up with measures to preemptively alleviate the burden on the public due to rising prices by the end of the month, including measures to support heating costs during the winter and to stably supply kimchi ingredients, among others.
“The government will strengthen monitoring with heightened vigilance, while actively responding to prevent instability in the foreign exchange market due to speculative transactions by offshore institutions. When necessary, the government will take bond market stabilization measures in a timely manner,” Choo said during an emergency meeting of economy-related ministries at the Seoul government complex on Thursday.
However, the finance minister remains upbeat on the economic recovery, saying that he expects inflation to stabilize again from October, when seasonal effects are to be mitigated.
“Price increases have been on a trend of overall slowdown this year. It is expected the inflation will stabilize again, given that service prices, which has been a key factor in the consumer price increase, continues to slow down,” Choo said .
“The CPI’s increase of over 3 percent for two consecutive months since August is attributed to a sharp rise in global oil prices and the soaring price of agricultural products in summer,” he added.
Despite the rising price trend, Choo highlighted the real economy is showing signs of a rebound particularly in production and exports.
“In August, mining and industrial production increased by the largest margin in 38 months thanks to a significant improvement in semiconductor production, the main driving force of the Korean economy, and the manufacturing operation rate was also at the highest level in a year,” Choo said.
