By Lee Hyo-sik
Staff Reporter
High oil prices, rising interest rates and other external negatives are casting a shadow over the South Korean economy that has just begun showing signs of a rebound on strong exports and recovering domestic consumption.
Analysts say rising international crude oil prices will make goods and services more expensive in the country, chipping away at corporate profits and reducing private consumption, while the U.S. economic slowdown, as a result of the housing market slump, will likely force American consumers to tighten their belts and buy fewer products from South Korea.
West Texas Intermediate (WTI) soared to an all-time high of $80.09 per barrel for October delivery on Thursday in New York on the news that some U.S. refineries are facing operation glitches. Also, Dubai crude, which accounts for most of South Korea's oil imports, reached $73.79 per barrel, the highest price ever.
Despite the OPEC decision on Wednesday to lift oil output by 500,000 barrels per day, oil prices have continued to climb on rising demand and speculative buying. Many market watchers say it is a matter of time for WTI to reach over $90 per barrel.
``International crude oil prices have increased nearly 30 percent this year as the demand from China and other developing countries continues to rise, while the oil supply has remained unchanged across the globe. Also, speculative forces have recently come into the market, further pushing up oil prices,'' said Song Tae-Jung, senior economist at LG Economic Research Institute.
He said strong oil demand indicates the global economy is growing, which is positive for local exporters. ``But high oil prices make products more expensive, worsening profitability of local companies and forcing local consumers to spend less.''
Another external risk for Korea is rapidly rising Chinese consumer prices. China has played the role of global factories, churning out various products at lower costs. But rising inflationary pressure in the world's fastest growing economy could make its products more expensive, forcing consumers in Korea and other countries to pay more for Chinese-made goods.
Consumer prices in China increased 6.5 percent last month from a year earlier, far higher than the government target of 3 percent, due to hikes in prices of pork and other food items.
``Inflationary pressure has built up on the Chinese economy for months mainly because of surging food prices.
But it is unlikely for high consumer prices to discourage Chinese consumers to spend less any time soon as the economy is growing by over 10 percent per year. So, Korean exports to China will likely continue to expand in the coming months,'' Song said.
But he also said high consumer prices will lead to a wage hike, which will negatively affect Korean companies operating in China.
A bigger problem for Corporate Korea is the slowing U.S. economy in the wake of the financial market turmoil as a result of subprime mortgage defaults.
A U.S. forecasting company Global Insight recently revised down this year's growth forecast for the world's largest economy to 1.9 percent from an earlier 2.1 percent, citing the unfolding housing market slump's negative effects.
``The sluggish U.S. housing market will likely continue for a foreseeable future, weighing down on the overall U.S. economy. If the U.S. financial market jitter goes on and its economic slowdown is substantial, worsening conditions will prompt U.S. consumers to save more and spend less, purchasing fewer products from South Korea and other emerging economies,'' Song said.