Signs of Stagflation Looming
By Lee Hyo-sik
Staff Reporter
Concerns are growing over the worst-scenario materializing for the South Korean economy. While domestic consumption and investment remain weak, consumer prices are growing at a fast clip, raising fears about possible stagflation ― low growth coupled with high inflation.
The economy has just recently begun showing signs of a rebound on strong exports and reviving private spending, but the much-awaited expansion may be short-lived as record high oil prices and other external negatives are increasingly putting pressure on the export-driven economy, according to analysts.
Also, the rising potential for inflation at home and abroad are posing another risk for corporate Korea as the high prices of goods and services cut consumer spending, while forcing the central bank to tighten its monetary policy, which could negatively affect business activity.
According to the National Statistical Office (NSO), consumer prices rose 3.5 percent in November from a year earlier, the fastest pace since October 2004, and are expected to show an upward trend in the coming months on tight supply of crude oil and other raw materials, as well as a weak dollar.
``The economy could fall into stagflation in the latter half of next year even though its extent will not likely be as severe as the one Korea grappled with during the oil shock in the 1980s,'' said Oh Moon-suk, vice president of the LG Economic Research Institute.
Adding upward pressure on inflation here are surging Chinese consumer prices. China has played the role of a global factory, 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 Korean consumers to pay more for Chinese-made goods.
Analysts have cautioned that the world's 13th largest economy may fall into stagflation as major investment banks and economic research institutes have revised down their growth forecasts for next year.
LG's Oh projected consumer prices will increase at a faster pace next year, expecting prices of crude oil and other raw materials to continue to head upward on a weak dollar and speculative demand, on top of tight supply across the globe.
``Coupled with rapidly rising consumer prices, which worsens the profitability of local companies and forcing local consumers to spend less, the Korean economy will likely lose momentum as its outbound shipments will slow because of a U.S. economic slowdown in the wake of the housing market slump,'' Oh said. He also said exports bound for China are likely to decline as the Chinese government's belt-tightening policies will negatively affect consumer spending.
Deutsche Bank, UBS and a number of other international investment banks had initially put their growth projections at somewhere between 4.5 percent and 5 percent, but they have cut the forecast to as low as 3.9 percent.