Korea faces growing deflation fears amid anemic global growth
Korea is facing growing fears of deflation as worsening economic situations at home and abroad are shrinking demand and property markets appear to be falling into a long-term downward spiral, experts said Wednesday.
They noted there will not be outright deflation anytime soon for Korea, but worried that stalling growth, weakened investment and slumping property prices could destabilize the domestic economy, calling for the government to take more aggressive action to avoid such possible predicaments.
Deflation refers to a situation where the inflation rate falls below zero percent. Economists generally believe that deflation benefits consumers, but it could be detrimental to people who owe money because their income shrinks while their debts do not. It is also bad for workers because it could signal economic weakness, pay cuts, and layoffs.
"In the wake of the collapse of Lehman Brothers, many countries in the world injected a great amount of money into the market and much part of the money flowed into East Asia whose economic conditions remain relatively in good shape and drove up inflationary pressures in the process here," said Byun Yang-gyu, a research fellow at the Korea Economic Research Institute.
"But global situations are turning bad, making it difficult for money to find where it should be... It will take more time to see whether deflation worries will really materialize but there are sufficient possibilities at this point," he added.
In 2008, when the global economy was thrown into chaos, many countries rushed to expand fiscal spending in a bid to buttress their fragile economies.
Those stimulus efforts paid off to some extent in boosting economic growth, but they came along as a heavy burden on their economies in the form of a fiscal debt crisis, which in turn put a brake on growth in major industrialized countries.
Deflation worries are intensifying, especially as the global economic recovery appears to be stalling in Europe, the United States and China.
The International Monetary Fund (IMF) recently revised down its global growth outlook for this year from 3.6 percent to 3.5 percent. The eurozone economy, in particular, was projected to contract 0.3 percent this year.
China's slowing growth poses yet another cause for concern, as it could lead to a significant drop in demand for products and services in one of the world's largest consumer markets.
The Chinese government said earlier that its gross domestic product (GDP) grew 7.6 percent in the second quarter from a year earlier, the first time that the rate fell below 8 percent in three years.
Adding to the deflation concerns, its consumer prices dropped 0.6 percent in June from May, the sharpest drop in two years. The production prices also dropped 2.1 percent over the same period.
South Korea's economy is not immune from slowing global growth.
The Bank of Korea recently lowered its 2011 growth outlook for Korea to 3 percent from 3.5 percent forecast in April and the government slashed its growth outlook from 3.7 percent to 3.3 percent.
During the first quarter of this year, the country's GDP advanced 0.9 percent from a quarter earlier, but market experts expect slower growth in the third quarter. The slowing growth is attributed to shrinking global demand coupled with anemic private consumption and investment on the domestic front.
South Korea's consumer price growth has been stabilizing in the 2 percent range, but some experts worry that it could signal a beginning of deflation, given that investment and consumption remain in a slump despite eased inflationary pressure.
Last month, the country's consumer price index grew 3.3 percent from a year earlier, the slowest gain in 32 months.
Against this backdrop, South Korea's central bank cut the key interest rate for the first time in more than three years last week, underscoring its urgency to cushion the bitter impact of the eurozone debt crisis on the local economy.
The rate cut followed several central banks' recent moves to lower interest rates, indicating that the global economic outlooks are getting cloudy.
Analysts say rate cuts by major central banks in the world might also be motivated to dispel looming fears about deflation, which could have much detrimental impact on the global economy than inflation.
Slowing property markets here are stoking deflationary fears as well. In June, house transactions declined 16.5 percent from a month earlier and plunged 29.3 percent from the same month in 2011, prompting concerns that a hard landing in the property market could deal a heavy blow especially to debt-ridden households.
Experts call for policymakers to take more active stimulus measures, including an additional rate cut, to prevent the economy from spiraling into the trap of deflation.
"The most standard way to cope with deflationary fears is to push for stimulus measures and expand the amount of money in the market," said Lee Geun-tae, an analyst at LG Economic Research Institute. "The recent rate cut by the central bank and stimulus measures announced by the finance ministry can be understood in that context."
Oh Jeung-keun, an economics professor at Korea University, however, called for more extensive action to keep such deflationary worries at bay.
"Deflation fears are growing. Basically, that is due to falling property prices," he said.
"The measures that the government has announced so far are not enough to dispel deflationary concerns... We need more actions to boost the property market and it could be necessary for the Bank of Korea to slash its benchmark interest rates once or twice more down the road," he added.
The government, meanwhile, said the economy is facing deflation risks at this moment and it is not considering taking any additional stimulus measure including an extra budget to support economic growth. Earlier, the government unveiled 8.5 trillion won (US$7.45 billion) in fiscal spending during the second half of this year. (Yonhap)