Korean Economy Faces Perfect Storm

  • By Shon Jin-seok, You So-yeon

    June 24, 2022 11:44

    The Korean economy faces a triple shock of a low won, runaway inflation and recession. Surging prices of crude oil and raw materials have increased the financial strain on Korea, leading to estimates that the country's trade deficit will rise to US$15 billion in the first half of the year, the highest since the 1997 Asian financial crisis.

    A further weakening of the won will make it increasingly expensive for Korea to import goods, which in turn will drive consumer prices up further after inflation reached around five percent for the first time in 14 years.

    Financial Supervisory Service chief Lee Bok-hyun told reporters on Thursday, "We could see a perfect storm approaching" of rising inflationary pressure, higher interest rates and a potential recession. "Some economic experts say the current situation resembles the oil shock, when inflation and an economic slump occurred simultaneously.

    /News1

    There are projections that the won will weaken to around W1,350 to the dollar as investors dump the Korean currency for safe-haven assets. U.S. Fed Chairman Jerome Powell told the Senate on Wednesday, "We are strongly committed to bringing inflation back down, and we are moving expeditiously to do so" by hiking interest rates further.

    Some U.S. pundits warn of a recession in the world's biggest economy. That means export-dependent countries like Korea will be hit especially hard. A weak won does help Korean exports by making Korean products cheaper to buy overseas, but global crude oil and energy prices are surging, which means the rising cost of imports will offset the benefits of export growth.

    There are fears that high consumer prices will dampen private spending, resulting in an economic slowdown. The low won also makes it more expensive for manufacturers to import raw materials, and they will be forced to pass the rising costs onto their customers.

    The Bank of Korea projects consumer prices will rise further next month. Sung Tae-yoon at Yonsei University said, "It appears that we have already entered stagflation." 

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