A perfect storm never experienced is coming… growing fear

There are clear signs that a ‘complex crisis’ where high exchange rates, high inflation, high interest rates, and low growth occur at the same time will be magnified. Next year’s economic growth rate is a staggering 2% ahead, and this year’s trade deficit is likely to reach a record $30 billion. There are concerns that the government’s ‘October peak price theory’ could be reversed or that high prices could continue at least beyond October. The government is considering various countermeasures, but there are many analyzes that it is not easy to reverse the situation because there are so many foreign variables.

○ BOK, IMF, OECD and ADB lowered their forecasts for next year

On the 21st, the Asian Development Bank (ADB) forecast Korea’s economic growth rate of 2.3% next year in its “Adjusted Asian Economic Outlook for 2022” report on the 21st. It was reduced by 0.3 percentage points from the previous forecast in July. This year’s growth rate was maintained at 2.6%, but the forecast for next year was cut relatively significantly.

The Organization for Economic Co-operation and Development (OECD) also raised its forecast for this year’s growth rate from 2.7% to 2.8% in its ‘Korea Economic Report 2022’ on the 19th. This year, consumption recovered due to the easing of COVID-19, which served as a support to the economy.

Last month, the Bank of Korea revised its economic growth forecast for next year from 2.4% to 2.1%. According to the International Monetary Fund (IMF), Korea’s growth forecast for next year dropped from 2.9% (April) to 2.1% (July).

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The trade deficit is also not serious. According to the import and export performance (provisional value based on customs) published by the Korea Customs Service on the same day, the trade balance between the 1st and 20th of this month was a deficit of $4.15 billion. The trade balance continued to be in the red from April to last month, but the outlook for September is not bright. If the trade deficit is confirmed by this month, the deficit will continue for six consecutive months for the first time in 25 years between January 1995 and May 1997. The accumulated trade deficit between this year and the 20th of this month has increased to $29.213 billion. This is larger than the largest annual trade deficit recorded in 1996 ($206.24 billion).

According to a survey conducted by the Federation of Korean Industries on the heads of research centers at 15 securities companies, respondents predicted that they would create a trade deficit of about $28.1 billion this year. Forty percent (six) of respondents expected a trade deficit of between $30 billion and $45 billion.

Exports, which have served as the backbone of the Korean economy, are also failing. Exports from the 1st to the 20th of this month were $32,958 billion, down 8.7% from the same period last year. If the monthly export growth rate in September is negative, it will be the first time since October 2020. During this period, US exports were $5.012 billion, down 1.1% from a year earlier. If the negative continues until the end of this month, exports to the United States will fall for the first time in 25 months since August 2020.

○ Theory of price swings

The government’s ‘October price peak theory’ is also under threat. Food prices are rising one after the other, and electricity and gas rates are expected to rise next month. Recently, there is even a sign of ‘stagnant inflation (steel + inflation)’ due to Pohang Works POSCO flooding. According to the steel industry, the retail price of domestic hot-rolled steel sheet last week was 1.09 million won per ton, up 100,000 from the previous week (990,000 won). During the same period, the price of heavy plates rose from 950,000 to gain 1.09 million, hot-rolled stainless steel gained from 4 million to 4.2 million, and cold-rolled stainless steel gained from 4.1 million to 4.3 million.

Food companies, including Nongshim, are raising the prices of processed foods such as kimchi, ramen, and snacks one after another. Electricity and gas rates are expected to rise next month.

It is very likely that the depreciation of the gain will continue for a significant period of time. In a report released on the same day, the Korea Economic Research Institute analyzed that when the trade balance improves, the value of the gain rises, but when the trade balance declines, the value of the gain falls. Although the trade balance changed from a surplus of $1.58 billion in August last year to a deficit of $9.49 billion in August this year, the won exchange rate (monthly average) increased from 1,161 won 10 to 1,320 won 40 (weak won) will . In the FKI’s survey of heads of research centers in 15 securities companies, respondents predicted that the highest exchange rate won this year would reach 1,422 won and 70 won (average).

The government has taken emergency measures. Deputy Prime Minister and Minister of Strategy and Finance Choo Kyung-ho held a meeting to check the import and export trends on the same day and said, “We will formulate measures to save energy and improve use efficiency so that volatility in reducing the balance of trade.” Deputy Prime Minister Choo, Bank of Korea Governor Lee Chang-yong, and Financial Services Commission Chairman Kim Joo-hyun are holding an emergency macroeconomic and financial meeting on the 22nd to discuss international financial market trends.

Reporter Do Byeong-wook/Lim Do-won/Lee Sang-eun dodo@hankyung.com