This file photo taken last Thursday shows containers stacked at the port of Busan in southeastern South Korea. (union)
The finance ministry said on Friday that the South Korean economy is facing high inflation and could lose growth momentum as export growth could slow amid heightened uncertainty in the external economy.
Rapid rate hikes by the Fed, a slowdown in China’s economy and a protracted war between Russia and Ukraine are increasing downside risks to the global economy, says the foreign ministry in a monthly economic assessment called Green Book. said in the report.
“Domestic demand is on a modest recovery trajectory as the job market improves and face-to-face services recover,” the report said.
“However, there are concerns about an economic slowdown as high inflation could partially weigh on economic sentiment and weigh on export growth amid a worsening external environment,” he added.
The Treasury Department cited the possibility of a third straight month of economic slowdown in August amid concerns about stagflation, a mix of slowing growth and high inflation.
Inflationary pressures in South Korea are rising rapidly due to higher oil and commodity prices and a recovery in demand from the pandemic.
The country’s consumer prices surged 6.3% y/y in July, the fastest in almost 24 years, accelerating from a 6% y/y surge in June. The central bank aims to keep inflation at his 2% in the medium term.
Last month, the Bank of Korea raised interest rates by an unprecedented 0.5 percentage points to contain rising price pressures. It was the sixth increase since August last year.
Rate hikes are intended to keep inflation in check, but they also increase the burden of debt servicing and could slow economic growth.
Exports, the main driver of South Korea’s economic growth, rose 9.4% year-on-year in July, marking the 21st straight month of growth.
However, the country suffered a trade deficit for the fourth consecutive month as soaring oil and commodity prices pushed up the country’s import costs.
The ministry said exports to China, South Korea’s largest trading partner, may be sluggish as key economic data from China in July showed weakening economic momentum.
“Since chip prices have fallen faster than the market expected recently, the government will closely monitor the impact on exports,” Finance Ministry official Lee Seung-han told reporters.
South Korea’s retail sales fell for the fourth month in a row in June as high inflation and rising interest rates weighed on consumption, according to separate government data.
A report from the ministry said continued increases in card spending and sales at department stores will have a positive impact on retail sales in July, but worsening consumer sentiment will lead to a recession in consumption.
Cards spend increased 15.5% year-over-year last month, marking the 18th straight month of growth. Department store sales increased 26% year-on-year.
However, domestic vehicle sales fell by 2.1%, marking the fifth straight month of decline.
South Korea’s consumer inflation expectations hit a record high in July amid rising energy costs, but consumer sentiment fell to its lowest in 22 months, according to a central bank survey.
Household incomes rose at their fastest pace in the second quarter due to cash transfers for pandemic relief, but households’ propensity to spend hit a record low amid rising inflation, according to the Bureau of Statistics.
In June, the government cut its 2022 economic growth forecast to 2.6% and sharply raised its inflation forecast for this year to 4.7%, the highest in 14 years. (union)