Index shows life’s getting harder

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Index shows life’s getting harder

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Living conditions have deteriorated as external economic forces weigh on Korean consumers’ purchasing power, according to the Bank of Korea.

The BOK released its gross national income (GNI) index for the first quarter showing that growth has dropped off considerably on-quarter.

People are also saving less despite the incipient stabilization of consumer prices following a long period of rampant inflation, the data showed. Shrinking GNI indicates a drop in purchasing power.

Real GNI edged up 0.2 percent on-quarter, falling short of previous quarter-to-quarter growth of 1 percent, the central bank said. This is the lowest growth rate in a year.

Figures were relatively promising in annualized terms, with the index moving up 2.5 percent in Q1 from early 2011, up from 2.2 percent posted in the final three months of last year.

Korea has not seen significantly higher on-year growth for a quarter since the end of 2010.

The central bank said one of the main contributors to the GNI’s slower on-quarter growth was worsening trade terms resulting from high crude oil prices.

In the first quarter, international oil prices surged above $120 per barrel. As a result, the country’s trade deficit expanded from 16.6 trillion won in Q4 of 2011 to 18.4 trillion won in the first three months of this year.

Additionally, Korea’s gross saving ratio fell 1.2 percentage points from Q4 to settle at 31.3 percent in Q1 as people’s disposable income could not keep pace with increased spending.

Spending rose 2.2 percent for the quarter while disposable income inched up a mere 0.4 percent, eating into households’ reserves.

Few expect the situation to improve in Q2.

“Although the price of Dubai crude has stabilized to the range of $100 per barrel, demand is falling as a result of the slowing global economy,” said Jung Sung-taek, a BOK official. “It will be difficult for the index to improve much in the second quarter, even if trade terms get better, as trade volume has been shrinking.”

Showing little faith in domestic sector-led growth, Jung said the future of the economy will likely hinge on exports.

Although the trade account is still posting a surplus, exports have been running out of steam as demand from China, the U.S. and Europe contracts.

Exports have been shrinking compared to a year ago since March and declined 0.4 percent last month in annualized terms. The only thing that has saved the trade account from sinking into the red is an even larger drop in imports. In May, these retreated 1.2 percent from the year-earlier period.

Exports have winced in reflection of sagging demand from Korea’s top trading partners, the U.S. and China. The former snaps up 10 percent of Korea’s exports, while China buys 24.2 percent.

In response, Seoul has focused on reinvigorating the market from within by encouraging more spending. Finance Minister Bahk Jae-wan said earlier this month that his main focus in the second half will be stabilizing consumer prices and vitalizing the domestic market. The government may even tap into its supplementary budget, he added.

It is also mulling revising down its optimistic outlook for economic growth this year from 3.7 percent to 3.5 percent, a move that may be executed later this month.

By Lee Ho-jeong [ojlee82@joongang.co.kr ]

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