Yoon Ja-young is in charge of articles translated by a generative AI system and edited by The Korea Times. She is interested in improving the newspaper through AI.
Inflation rate may fall below 1 pct. Lack of momentum for recovery adds to deflation concern
Stacks of 100-euro-bills piled up at the Korea Exchange Bank headquarters in downtown Seoul, Thursday. The Euro has fallen in value to around $1.18 per euro upon concern over deflation in EU. / Yonhap
By Yoon Ja-young
By Yoon Ja-young
After global oil prices recently fell below $50 per barrel, some economists lowered their outlook for the country’s inflation rate to below 1 percent. Low inflation, coupled with slow growth, is adding to concerns that Korea may fall into Japanese style deflation.
Samsung Securities recently lowered its inflation outlook for the year to 0.9 percent from its previous estimation of 1.4 percent, citing the falling oil prices. Credit Suisse also cut its inflation outlook to 0.9 percent from 2.9 percent. It pointed out that fuel plays a huge part in consumer prices.
If their estimate turns out to be correct, the country will see inflation fall to below 1 percent for the first time since 1998.
That is far below the central bank’s estimate of 2.4 percent; but it is also expected to lower its prediction soon too. The Bank of Korea Governor Lee Ju-yeol told media last month that “lowering the inflation outlook is inevitable,” citing falling international oil prices.
The government is positive about falling oil prices meanwhile. The state-run Korea Development Institute expects GDP growth to rise by a 0.1 percentage point if oil remains at $60 per barrel and the global economy continues its recovery. The current account surplus will also increase by $5.3 billion, with exports increasing on falling oil prices ― consumers overseas will have more money to spend and production costs will also be slashed for exporters.
The problem is that low inflation is coupling with a slowing down of economic recovery momentum. Industrial output grew by a mere 0.1 percent in November from the previous month. Compared with the previous year, it decreased 0.5 percent. Analysts are not positive about the record-high $11.4 billion current account surplus, as this is due to sluggish domestic demand rather than an increase in exports. Some say the condition reminds them of Japan, which slid into deflation after marking a “recessionary surplus.”
“When you look at the global economy, a considerable number of economies except the United States are fighting deflation,” said Cho Byung-hyun, an analyst at Yuanta Securities. “The government should take active measures to ease deflationary concerns,” he said.
So Jae-yong, an economist at Hana Daetoo Securities, said falling oil prices will have a positive effect in the mid- to long-term. However, it would be burdensome to simply wait until then to act, due to the lack of momentum for recovery, he adds.
“The economic indices have faltered together. Consumer sentiment is sluggish due to growing uncertainties and a structural problem. Exports aren’t expanding notably either due to the slowdown in global demand,” he said.