All major indicators of our economy are shaking. The decline in the stock market was the largest among the G20 (20 major countries), and the exchange rate jumped to the highest level since the global financial crisis. The trade balance is in bad shape, with a deficit of nearly $10 billion last month. Inflation is also on the rise, raising concerns about stagflation.
The Korean stock market’s decline is the highest in the G20 this year
As of the 9th, the Korea Exchange compiled the fluctuation rate of this year’s representative G20 stock index as of the 7th. As a result, the KOSDAQ index fell 25.98% from the closing price on January 3 this year, the highest among the indexes of 20 countries.
The US (Nasdaq Index -25.52%), Italy (22.51%), and Russia (-23.36%) were followed by the highest decline. Germany (-19.38%), European Union (-17.29%), France (-15.40%), China (Shanghai Composite Index -14.72%), Mexico (-13.00%), Australia (-12.22%), South Africa (- 10.22%), Japan (Nikkei 225 Index -6.39%) and India (-0.26%) also fell.
This year, stock markets in major countries were weakened by concerns about a strong interest rate hike by the US Federal Reserve (Fed) and the prospect of economic recessions in Europe and China. The Federal Reserve will hold its Federal Open Market Committee (FOMC) meeting on the 20th and 21st of this month.
The exchange rate is at its highest level since the global financial crisis.
In the Seoul foreign exchange market, the won-dollar exchange rate ended at 1,380.8 won per dollar, down 3.4 won from the previous day’s closing price. The uptrend stopped after six trading days, but it is still at a high level. The exchange rate recorded 1384.2 won on the 7th, but it is the first time in 13 years and 5 months since the global financial crisis that the exchange rate exceeded 1,380 won. Based on the closing price, it was the highest since March 30, 2009 (1391.5 won), and on April 1 of the same year (1392.0 won) in the mid-day high.
As the exchange rate rose rapidly, the balance of dollar deposits at five major banks, including KB Kookmin, Shinhan, Hana, Woori, and NH Nonghyup Bank, decreased by 660 billion won in five trading days. 5 major banks
As of the 7th, the balance of the dollar deposit was $56.79.94 billion (about 78.62 trillion won), which was $ 476.74 million (about 660 billion won) less than the end of August ($57.268.38 million) in 5 trading days. Investors seeking foreign exchange gains seem to have sold the dollar.
◆Economic support trade also stumbles… August deficit close to $10 billion
Last month, the trade balance recorded a deficit of 9.47 billion dollars (about 12.7 trillion won). It is the largest deficit in history in 66 years since trade statistics began to be compiled in 1956. This is nearly double the previous record, which was recorded in January of this year (-4.95 billion dollars). In the meantime, the monthly trade deficit exceeded 4 billion dollars only three times in January and July of this year (-4.805 billion dollars) and in January 2008 (-4043 billion dollars) during the global financial crisis.
Exports last month were $56.67 billion, an increase of 6.6% compared to the same month of the previous year, which was relatively good. However, as imports increased 28.2% to $66.15 billion, the increase was even greater, so the deficit widened. In particular, in export, semiconductor exports fell 7.8% in the aftermath of weakening global demand and falling prices, the first decline in 26 months. In terms of imports, imports of the three major energy sources, such as oil, gas and coal, amounted to $18.52 billion, a 91.8% ($8.86 billion) increase from the same month of the previous year.
From January to August this year, cumulative exports and imports totaled $467.8 billion and $492.5 billion, respectively, all-time highs. The accumulated trade deficit from January to August was also the largest ever at $24.723 billion.
Solving concerns about stagflation
The high exchange rate is a factor that raises prices. The depreciation of the won pushes up import prices and acts as an upward pressure on domestic prices. In August, the consumer price inflation rate stood at 5.7%, which stopped the upward trend for the first time in seven months, but it is still high considering the Bank of Korea’s inflation target (2%). Moreover, external variables such as oil production cuts by oil-producing countries and the trend of the Russia-Ukraine war still remain.
The high exchange rate also acts as an upward pressure on the central bank of the BOK. When the US benchmark interest rate greatly exceeds Korea, foreign investment funds flow out, and a weak won increases domestic price inflation due to an increase in import prices. Accordingly, the BOK is under pressure to raise the base rate. Lee Chang-yong, governor of the Bank of Korea, said in an interview with a foreign press, “It is difficult to end the rate hike before the US.”
The appreciation of the exchange rate (the weak won) has helped export companies in the past, but it is not a big boon now. The International Trade Research Institute of the Korea International Trade Association analyzed the effects of fluctuations in raw material prices and exchange rates on imports and exports. As a result, if the raw material price and the won/dollar exchange rate rise by 10%, respectively, imports increase by 3.6%, while exports increase by only 0.03%. have been analyzed. When raw material prices and exchange rates rise, the effect of increasing imports is greater than exports.
Airlines that have to pay fuel costs, aircraft lease fees, and maintenance fees in dollars are already being hit directly by the high exchange rate. In the memory semiconductor industry, which is the main industry in Korea, concerns are growing over the observation that the deterioration of the industry situation in the second half of the year will be accelerated if the US further raises interest rates. The oil refining industry, which issues large-scale bonds in the process of introducing crude oil, increases its interest burden as interest rates rise.
Concerns are growing over stagflation, which only raises prices amid economic stagnation in a situation where the high exchange rate causes high inflation and high interest rates and does not help export much. The Korea Economic Research Institute (Korea Economic Research Institute) recently analyzed in its ‘Stagflation Experience and Policy Implications’ report that if Korea’s economic growth rate falls to the low 2% range in the second half of this year, it is highly likely to enter stagflation.
By Woo Sang-gyu, staff reporter email@example.com
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