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Korean Economy Suffers Under Low Growth, High Price

Posted July. 02, 2008 08:19,   


Korea’s economic growth rate is expected to reach a mere 3.9 percent in the second half, far lower than the initial estimation, while consumer price will grow 5.2 percent for the same period. That means Korea is facing stagflation in which consumer price increases amid inflation.

At the same time, in the first half, Korea recorded trade deficit for the first time in 11 years.

In its report, “Economic Forecast for the 2H 2008” released yesterday, the Bank of Korea predicts Korea’s economic growth rate will fall from 5.4 percent in the first half to 3.9 percent in the second half, while the consumer price index will increase from 4.3 percent to 5.2 percent over the same period. It is first time that consumer prices will grow more rapidly than the economy since the second half of 2003 when the credit card bubble burst.

In late 2007, the central bank forecasted that Korea’s economic growth rate would reach 4.4 percent while the nation’s consumer price would increase 3.1 percent. With its economic forecast changed, the bank lowered the nation’s annual economic growth rate for 2008 to 4.6 percent, down from its initial estimation of 4.7 percent, and raised Korea’s inflation for 2008 by 1.5 percentage points to 4.8 percent.

Behind the surging consumer price stand two factors: the price of petrochemical products has grown rapidly and firms have raised product prices in advance based on the judgment that consumer price would grow further.

The National Statistical Office announced yesterday that consumer price increased 5.5 percent from a year ago in June due to an increase in service charges. By month, the surge in consumer price in June was the biggest since November 1998 when it increased 6.8 percent from the previous year.

The oil price surge is the major reason behind the falling economic growth rate. Corporations suffering from the high cost have cut their investments while consumers with reduced real purchasing power have tightened their purse strings. Corporate investment into facilities and equipment fell 2.5 percent from the previous year and sales of consumer goods decreased 0.6 percent from a year ago in May.

Concerns are mounting that a prolonged difficulty represented by low economic growth and rapid consumer price growth will result in stagflation.

Yoo Byeong-sam, economics professor at Yonsei University, said, “In the 1970s, oil prices temporarily surged since oil-producing states colluded. On the other hand, the oil price has recently kept increasing since demand exceeds supply. It seems that Korea is heading towards stagflation.”

Economists worry that consumer prices will grow more rapidly in the second half since the international oil prices are reflected on consumer prices with a time lag of one or two months.

Some have even expressed their concerns that Korea, with heavy dependence on trade, might face its growth limit since the nation recorded a trade deficit of US$5.71 billion for the first time since the first half of 1997. Heo Chan-guk, research fellow of the Korea Economic Research Institute, said, “If an increase in consumer price pushes up income level, the cost of products also increase, thus aggravating stagflation. Corporations and workers should share the burden and heighten the efficiency of the public sector, thus contributing to economic growth.”