Consumer prices tumble to 21-month low as GDP outlook worsens

A customer pumps gas into a vehicle at a gas station in Seoul on Tuesday. Sharp drops in petroleum prices for the last two months helped ease inflationary pressure. [YONHAP]

Falling petroleum costs have allowed Korea’s consumer price growth to dip below 3 percent for the first time in nearly two years in June.

Easing inflationary pressure is expected to soften the burden for Korean households when buying necessities while debt concerns may be eased with the rising possibility of interest rates being lowered later this year.

However, this does not translate to an improvement in the economy. The government has lowered the GDP growth outlook for this year from 1.6 percent to 1.4 percent, citing trade struggles.

According to Statistics Korea on Sunday, consumer prices rose 2.7 percent in June compared to a year ago. The last time consumer prices grew around 2 percent was in September 2021 when it was up 2.4 percent year-on-year.

Consumer price growth has been on a downward trajectory since February when it fell to 4 percent after remaining above 5 percent for nine consecutive months.

The biggest contributor to the falling prices in recent months has been fuel products, which plunged 25.4 percent compared to the same period of last year, hitting a record low since the statistics agency began compiling the data in 1985.

Core inflation, which excludes volatile agricultural and energy prices, registered at 4.1 percent, the lowest rate since May last year.

“The prices of petroleum goods in May fell 18 percent year-on-year and last month it dropped 25.4 percent,” said Kim Bo-kyung, a senior official at Statistics Korea. “It could be said that 75 percent of the drop compared to May’s [3.3 percent year-on-year growth] is from the drop in petroleum price.”

The government on Tuesday revised its outlook on consumer price growth from 3.5 percent earlier this year to 3.3 percent.

“Among the [Group of 20] countries, there are only three where consumer price grew in the two-percent range,” said Finance Minister Choo Kyung-ho during a press briefing. “When compared to major OECD [Organisation for Economic Cooperation and Development] countries, [Korea’s consumer price growth] is distinctively lower.”

As the consumer price has been dropping since February this year, the pressure on the Bank of Korea (BOK), which has aggressively tightened monetary policy since last year, is expected to have more room to maneuver.

The key interest rates, which were at an all-time low of 0.5 percent until July 2021, have been steeply raised since August of that year when the Covid-19 pandemic showed signs of stabilizing.

Interest rates have since risen to 3.5 percent. The last time the BOK hiked up the rates was in January.

Some are projecting the BOK will likely loosen the monetary policy including HSBC which expects a 0.25 percentage points cut in the last quarter of this year and an additional 0.25 percentage points cut in the first three months of 2024.

However, the Korean government kept a conservative view on the overall economic growth projection as it shaved 0.2 percentage points off its initial projection.

The government’s latest projection is lower than many other institutions, most of which project 1.5 percent growth, including the Korea Development Institute (KDI), the International Monetary Fund (IMF) and the OECD.

The OECD was the latest to revise its outlook, which was lowered from 1.6 percent to the current outlook in June.

The BOK is the only institution that shares the newly revised government outlook of 1.4 percent.

The biggest hurdle facing Korea is trade.

Korean export numbers have been falling in the first half of this year as the global market has yet to recover from Covid-19 alongside the relatively weak impact of China’s reopening, which many had expected to boost some of Korea’s key industries, especially semiconductors.

“In the first half of this year, exports have fallen year-on-year while the first five months [have] recorded a [trade] deficit,” Finance Minister Choo said. “It was only able to return to black last month.”

Korea’s exports in the first half shrunk 12.3 percent year-on-year to $307.3 billion. Imports fell 7.7 percent year-on-year to $333.6 billion.

This left the trade deficit at $26.3 billion, which is more than double the $10.9 billion recorded a year ago. Shrinking exports with China also played a crucial role.

Exports to China, which is Korea’s biggest trading partner, shrunk 26 percent year-on-year to $60.2 billion largely due to falling demand for Korean semiconductors, which dropped 37 percent to $43.2 billion. Exports of semiconductors to China, which is Korea’s biggest customer at 37 percent, fell 25 percent year-on-year in the first half.

“We cannot allow ourselves to loosen up as there are uncertainties in the global economy and financial markets, including the slow recovery of the United States and China, the possibility of the IT industries’ recovery delay, the volatility of the global financial markets and the continuing war between Russia and Ukraine,” Finance Minister Choo said.

However, the Finance Minister said he was optimistic of positive signs on the horizon as the second half of the year progresses, including an improvement in semiconductor and ship exports in June and lower inflationary pressure.

“Although we expect growth to be at 1.4 percent, which is lower than our initial projection,” Choo said. “We expect recovery to be two times faster than in the first half [of the year] including the rapid recovery of the IT industries.”

BY LEE HO-JEONG, PARK EUN-JEE [lee.hojeong@joongang.co.kr]