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South Korean economy likely to slow amid high inflation: ministry

This file photo taken last Thursday shows stacks of containers at a port in South Korea’s southeastern city of Busan. (Yonhap)

South Korea’s economy is feared to lose growth momentum as the country grapples with high inflation and export growth may slow amid heightened external economic uncertainty, the Finance Ministry said on Friday.

The US Federal Reserve’s rapid rate hikes, China’s economic slowdown and the protracted war between Russia and Ukraine have increased downside risks to the global economy, the ministry said in its monthly economic assessment report, the Green Book.

“Domestic demand is on a moderate recovery path on the back of improvements in the labor market and a recovery in personal services,” the report said.

“But amid deteriorating external conditions, there are concerns over the economic slowdown as high inflation has weighed in part on economic sentiment and could weigh on export growth,” she added.

The Treasury raised the possibility of an economic slowdown for the third straight month in August amid concerns about stagflation, a mix of slowing growth and high inflation.

Inflationary pressures in South Korea have been building rapidly on high oil and commodity prices and a recovery in demand following the pandemic.

The country’s consumer prices rose 6.3 percent year-on-year in July, the fastest in nearly 24 years, accelerating from a 6 percent year-on-year rise in June. The central bank aims to keep inflation at 2 percent in the medium term.

Last month, the Bank of Korea implemented an unprecedented 0.5 percentage point hike in interest rates to tame mounting price pressures. It was the sixth rate hike since August last year.

A rate hike is expected to curb inflation but could increase debt service burdens and slow economic growth.

Exports, the main driver of Korea’s economic growth, rose 9.4 percent year on year in July, marking the 21st straight month of growth.

But the nation suffered a fourth straight month of trade deficit as high oil and commodity prices pushed up the country’s import bills.

The ministry said South Korea’s exports to China, its largest trading partner, could become sluggish as China’s key economic data in July pointed to its slowing economic momentum.

“As chip prices have recently fallen faster than the market expected, the government will closely monitor their impact on exports,” Lee Seung-han, an official with the Treasury Department, told reporters.

South Korea’s retail sales fell for the fourth straight month in June as high inflation and rising interest rates weighed on consumption, separate government data showed.

The ministry’s report showed that card spending continues to rise and department store sales will positively impact retail sales in July, but deteriorating consumer sentiment would spell a pullback for consumption.

Card spending rose 15.5 percent year-on-year last month, marking the 18th consecutive month of gains. Department store sales rose 26 percent year-on-year.

But domestic auto sales fell 2.1 percent, extending its decline for the fifth month.

South Korean consumers’ inflation expectations hit a record high in July amid rising energy costs, while consumer sentiment fell to its lowest level in 22 months, a central bank survey showed.

Household income rose the fastest in the second quarter on cash spending for pandemic relief, but household propensity to consume hit a record low amid heightened inflation, the statistics agency said.

In June, the government lowered its 2022 economic growth forecast to 2.6 percent, while significantly raising this year’s inflation forecast to a 14-year high of 4.7 percent. (Yonhap)

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