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Inflation is rampant, yet consumers reluctant to open purse nowBy Cho Jin-seo
The spring has come to Seoul in an unusual and unpleasant combination of wintry temperature and dusty wind from China. Korea’s macroeconomic condition is no less appalling, as high inflation is combined with hazy growth prospect.
Rising crude oil prices are affecting the cost of almost every consumer item. The consumer price index of the finance ministry jumped 4.5 percent in February compared to the same month last year, which far exceeds the government’s target of 3 percent.
The problem is that it can become worse. There are worries that the inflation index may exceed 5 percent in March, when the effects of high oil prices take full swing.
“After March, the inflationary environment will change depending on the global crude oil and other commodities market movements. We will closely monitor the price changes of commodities and will try to minimize its effects on inflation,” said vice finance minister Yim Jong-yong on Friday as he hosted a meeting of 11 government agencies.
Last week saw a dramatic increase of pressure on inflation. The CRB index, which measures prices of 19 core commodities at major exchanges in the U.S., jumped 5.4 percent last week alone. Crude oil prices also rose by about 7 percent. This will eventually turn into inflationary pressure next month on the prices of many consumer items from fuels to utilities to chemicals and foods.
The title of a Morgan Stanley report last week succinctly summarizes the current situation ― “Worse still to come.”
“Inflation in Asia has been the most important macro issue concerning investors and this has now been echoed by consumers,” it said.
In an ordinary inflationary environment, economic growth tends to rise as inflation rises because people spend more today before things get more expensive tomorrow.
But this time is different, because the inflation is caused not only by fiscal or monetary expansion but also (probably more so) by the rising commodities price. Using industry jargon, the Morgan Stanley report says that the “negative CPI-PPI spread historically lead to downward pressure on earnings estimates.” In plain words, this means that consumers are more pessimistic than corporations, so the economy will get dented when firms eventually find out that people are not buying their goods anymore.
The same report also shows the result from a survey that showed Korean consumers were the least confident in Asia. Only 17 percent of Koreans see now as a good time to buy a car, while the Asia average is 29 percent. About a half of the respondents said that they think real estate price has peaked, compared to an average of 25 percent in Asia.
Moreover, one third of them said straightforwardly that they will reduce spending. And more than two thirds think household wage increments will not be able to keep pace with inflation ― again the highest ratio in East Asia and India. In order words, most Koreans are worried that they will get poorer.
Growth projection varies
On the growth side, expectations vary. The bears say that high oil prices will damage growth. According to a recent report from the OECD, a think tank of rich countries, economic activities in its member countries will decrease by 0.5 percent for every $25 increase in the crude oil price.
This analysis leads to a simple calculation that Korea has already lost just 0.5 percent of growth potential. The finance ministry had supposed that the average oil price for 2011 will be around $85. Now the Dubai crude price is close to $110 - A half percent gone from Korea’s 5-percent growth target.
Several foreign banks have already made adjustment by themselves. Barclays, the U.K. bank, last week lowered its expectation on the Korean economy’s growth from 4.5 percent to 4 percent, while lifting the inflation rate prediction from 2.7 percent to 3.4 percent.
But there are bulls as well. HSBC economist Stephen King said on Thursday that the bank keeps its projection on Korea’s economic growth at 4.75 percent.
Hyun Oh-seok, the chief of government think tank KDI, was even more optimistic. In a recent lunch meeting with reporters, he said that the KDI is considering upping its GDP growth forecast from 4.2 percent to as much as 5 percent.
The reason for this optimism is brisk corporate performance, especially at big firms. The KOSPI is over 2,000 again. Morgan Stanley’s Shawn Kim recommends stocks in materials, construction and oil-related industrial sectors as they are better positioned to cope with the rising oil.
Either way, what is certain is that the economic situation has become much more difficult to predict than last year.
“Last year, what we had to do was to run straight forward,” said KDI’s Hyun, referring to the expansionary fiscal and monetary policy the government has used. “But this year, there are multiple goals that clash with each other.”
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