Domestic demand improvement ‘good news’ and inflation ‘concerns’ emerged as keywords for the Korean economy in June. Domestic demand improvement is confirmed by various government statistics, and the possibility of an increase in economic growth rate is increasing. With the governor of the Bank of Korea making remarks suggesting the possibility of a rate hike, the possibility of an early rate hike within the year is growing.
‘Worried’ over the continued upward trend in domestic and overseas prices
According to the ‘Recent Economic Trends (Green Book, June issue)’ published by the Ministry of Strategy and Finance on the 11th, the consumer price index in May rose by 2.6% from a year ago due to the base effect and rising prices of petroleum, livestock and fishery products. This is the highest growth rate in nine years and one month since April 2012 (2.6%).
The cost of living index, a perceptual index, rose 3.3%, increasing the increase compared to the previous month (2.8%). Core inflation, which shows the key price trend, also rose 1.5%, the largest increase since September 2017 (1.6%).
International oil prices also continued to rise as the summer season entered the peak season with expectations for a global economic recovery. International grain prices such as corn and wheat and non-ferrous metals such as copper, aluminum and nickel are also on the rise.
According to the import and export price index statistics released by the Bank of Korea on the same day, the import price index (provisional value in Korean won, the 2015 level of 100) as of May was 112.41, up 2.6% from April (109.56). Compared to a year ago, it increased by 13.8%.
The index rose for four consecutive months from December of last year to March of this year on a monthly basis, then fell slightly -0.2% in April, but then turned to an upward trend again in a month.
Mineral products (6.4%) among raw materials and primary metal products (4.0%) among intermediate goods showed a large increase. International oil prices rose 5.4% based on Dubai crude. Agricultural, forestry and fishery products and coal and petroleum products also rose by 2.5% and 2.3%, respectively.
The export price index for May was 106.06, 1.5% higher than in April (104.46). It is the sixth month since November of last year. Compared to the same month of last year, it rose 12.3%, the highest in 12 years and 2 months since March 2009 (17.4%).
Economic growth expected to improve as domestic demand improves
The government’s assessment is that domestic demand is improving. The Ministry of Strategy and Finance published an analysis in the Green Book, saying, “Recently, the domestic economy has continued to improve while exports and investment have continued to recover, and employment has increased significantly for two months in a row.” It maintained the evaluation of ‘improving domestic demand’ for the second month following last month.
Previously, the government mentioned ‘relieving sluggish domestic demand’ for the first time since the outbreak of Corona 19 in the economic trends in April this year, and has been diagnosing ‘improving domestic demand’ from May.
The domestic credit card approval amount in May increased 6.8% from a year ago, continuing the upward trend for four consecutive months since February. Department store sales also rose 17.3%, recording an increase for the fourth straight month. While online sales (48.4%) continued to grow sharply, discount store sales (6.8%) also rebounded for the first time in a month.
The consumer sentiment index (CSI) in May rose 3 points from the previous month to 105.2, continuing the improvement trend for the fifth straight month since January of this year. The index has exceeded the reference level (100) for three months since March.
The number of Chinese tourists who visited South Korea last month also surged 131.4 percent. However, domestic sales of domestic passenger cars decreased by 17.0%.
Earlier, the Bank of Korea announced on the 9th that the real gross domestic product (GDP) growth rate (provisional) in the first quarter of this year was 1.7%. This is an increase of 0.1 percentage point from the earlier preliminary estimate in April, raising the possibility that the Korean economy will grow by more than 4.0% this year.
The Bank of Korea analyzed that domestic demand drove the GDP growth in the first quarter of this year. The contribution to growth-related net exports (exports – imports) changed from 1.6 percentage points to -0.3 percentage points, and the contribution to domestic demand rose from -0.5 percentage points to 1.9 percentage points. It is consistent with the analysis of the Ministry of Finance.
Possibility of rising interest rates due to inflationary pressure
While it is good news for the economy to recover quickly from the COVID-19 tunnel, inflationary pressures are a concern.
On the 10th (local time), the US Consumer Price Index (CPI) for May rose 5.0% from the same month of the previous year, surpassing the market consensus of 4.7%. It is the biggest rise in 13 years since August 2008, when the international oil price exceeded $150 per barrel.
“Externally, the global growth outlook has been raised due to vaccines and policy effects, but concerns about inflation due to rising raw material prices persist,” the government analyzed. This is a reference to concerns over external inflation for the fourth consecutive month since March of this year.
Although both the Korean and US governments have drawn the line that inflationary pressure is a temporary phenomenon, the possibility of an early rate hike is gradually increasing.
In a speech commemorating the 71st anniversary of the BOK’s 71st anniversary on the same day, BOK Governor Ju-yeol Lee said, “I will tell you about the things that need to be emphasized after the second half of the year.” We will have to normalize it in an orderly manner from this point on. He also said, “The volatility of domestic and foreign financial markets may increase due to the future global inflation situation and changes in expectations for monetary policies in major countries.” He said, “We will closely monitor the factors of market instability and take market stabilization measures in a timely manner if necessary.” It is interpreted as a statement suggesting an interest rate hike within the year.
The market also responded quickly. Samsung Securities announced on the same day that it would change its benchmark interest rate forecast for Korea from a hike in the first half of 2023 to a 25bp (1bp=0.01%) increase in October and November of this year. Daishin Securities also evaluated that “Governor Lee’s remarks suggest the possibility of a change in the policy rate cut and aggressive monetary easing after the COVID-19 outbreak.” I want to,” he said.
Reporter Hyeong-jun Um, Sejong = Reporter Sang-gyu Woo [email protected]
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