By Baek Byung-yeul
The Korean economy is showing signs of “quasi-deflation” due to low consumer prices and the ongoing economic slowdown, the Hyundai Research Institute warned Monday.
The private economic think tank called for the government to expand fiscal spending and slash the base rate to prevent the economy slipping into deflation.
The think tank said in a report that the country's consumer price growth in 2018 remained at around 1.5 percent and the figure has stayed below 1 percent this year for the fourth consecutive month through April.
Though consumer prices haven't contracted in 2019, the institute said this can be interpreted as a signal of quasi-deflation, which occurs when the general level of prices is declining, being associated with weak economic conditions.
Quasi-deflation may lead the economy into a vicious cycle as the low consumer prices reduce the purchasing power of consumers. Due to the lower consumption, companies may face a decline in demand for their goods.
To break the vicious cycle, the institute called for the government to take every possible action.
“Utilizing every possible policy measure, the government is urged to avert the prolonged price decline and boost the economic growth rate,” Oh Jun-beom, a researcher at the institute, said.
“Increasing the government's fiscal spending and implementing a tax cut policy are needed to be brought up. Even though it won't have an immediate effect on the economy, lowering the interest rate should also be considered.”
The institute said sluggish domestic demand has caused the low consumer prices. Retail sales in the first quarter of 2019 increased only 1.3 percent from the previous quarter and equipment investment decreased 5.4 percent. Also the worsening employment conditions of people in their 30s to 50s, who have been the major consumer group here, led the decline in consumer prices.
Price stabilization on the supply side is another factor for low consumer prices, the report said. “Though oil prices have been creeping up recently, prices are still lower than a year ago. Prices for agricultural and fisheries products, and raw materials have also stabilized,” the report said.