The Korea Development Institute said on Sunday that the South Korean economy faces increased downside risks due to rising inflation and worsening external conditions.
The institute said in its monthly economic assessment report that the South Korean economy, Asia’s fourth-largest, is on a moderate recovery path, but downside risks are mounting in manufacturing due to economic downturns in the US and China.
The report said: “External conditions worsened due to a significant slowdown in economic growth in China, and the US economy recorded a quarterly decline … The indirect impact of higher interest rates also clouded overall economic activity.”
Concerns about stagflation, a combination of slowing growth and rising inflation, have intensified due to increased economic uncertainty due to the Ukrainian crisis and higher interest rates by the US Federal Reserve.
South Korea’s exports rose 9.4% year-on-year in July, continuing its 21st consecutive month of growth, but the country has a trade deficit for the fourth consecutive month due to rising global energy prices.
Earlier, the government said the Korean economy could lose momentum due to growing economic uncertainty overseas, leading to weak growth in investment and exports.
Fears of a global recession are also heightened by concerns that an aggressive monetary tightening by the Federal Reserve could send the US economy into recession.
South Korea is also facing mounting inflationary pressures from higher energy and food prices and a recovery in demand from its previous decline due to the pandemic.
The CPI rose 6.3% year-on-year last month, the fastest year-on-year increase in nearly 24 years and an acceleration from the index’s 6% year-on-year rise in June.
High inflation undermines the purchasing power of citizens and can affect private spending. The interest rate hike is aimed at curbing inflation, but could increase the debt service burden and slow economic growth.
Retail sales in the country also fell for the fourth consecutive month in June, according to Statistics Korea, as high inflation and higher interest rates weighed on consumer confidence.
In July, the Bank of Korea carried out an unprecedented 0.5 percentage point interest rate hike in an attempt to tame inflation, the sixth rate hike since last August, and the central bank is expected to raise interest rates again in the coming months.
The government cut its 2022 economic growth forecast to 2.6 percent, sharply raising its inflation forecast to a 14-year high of 4.7 percent.
The Bank of Korea also expected the economy to grow by 2.7% and inflation rise by 4.5% this year.
Source: Yonhap