Government Warns of 'Economic Slowdown' for Three Consecutive Months... "Exports Recovery Hindered"

Lee Seunghan, Director of Economic Analysis at the Ministry of Economy and Finance, is presenting the recent economic trends on the morning of the 20th at the Government Complex Sejong in Sejong City. 2022.7.20 [Image source=Yonhap News]

[Asia Economy Sejong=Reporter Son Seon-hee] The government expressed concerns about an economic slowdown for the third consecutive month due to continued inflationary pressures caused by worsening external conditions. In particular, as exports, the core driver of the Korean economy, are expected to remain sluggish for the time being, dark clouds seem to be looming over the economy.

The Ministry of Economy and Finance stated in the 'Recent Economic Trends for August (Green Book)' published on the 19th, "Recently, our economy has been showing a gradual improvement in domestic demand due to recovery in employment and face-to-face service industries," but also diagnosed that "amid continued high inflation due to worsening external conditions and some impact on economic sentiment, there are concerns about an economic slowdown, including constraints on export recovery." The possibility of a slowdown has been mentioned for three consecutive months since June.

The Ministry explained, "Externally, volatility in international financial markets has somewhat eased," but "amid ongoing global inflation, the interest rate hike trend in major countries, growth slowdowns in the US and China, and the prolonged Russia-Ukraine war have continued to expand downside risks to the global economy."

Last month, consumer prices rose 6.3% year-on-year due to an expanded increase in prices of agricultural, livestock, fishery, and marine products. This rise was larger than the previous month's 6.0%. Core inflation, which shows the underlying trend of prices, also increased by 4.5%.

The Consumer Sentiment Index (CSI) for July plummeted by 10.4 points from the previous month to 86.0. When the index falls below the baseline value of 100, it is judged that consumer sentiment is more contracted than the average economic situation, indicating that consumers' perceived economic conditions have worsened. The Business Sentiment Index (BSI) for all industries also remained at 80, down 2 points from the previous month. Lee Seung-han, head of economic analysis at the Ministry of Economy and Finance, explained, "In June, the US implemented a big step (a 0.5 percentage point increase in the base interest rate), which caused instability in financial and stock markets and an overall rise in inflation, negatively affecting household consumer sentiment. However, in July, there was also some volatility due to changes in the sample used to survey consumer sentiment."

However, last month's domestic card approval amount increased by 15.5% compared to the same month a year ago, maintaining an upward trend. The increase was also larger than the previous month's 12.5%.

Exports, the core driver of the Korean economy, remained in single-digit growth for the second consecutive month. Last month, exports rose 9.2% year-on-year to $60.57 billion (daily average of $2.58 billion). This is analyzed to be due to sluggish growth in major export markets, the US and China. When asked about export prospects, Lee said, "Initially, we expected a rebound from the second half of the year as China eased its COVID-19 prevention measures, but July's retail sales and industrial activity indices were much weaker than market expectations, so there is a high possibility that sluggish exports to China will continue. Concerns about economic slowdown stem from constraints on exports and the decline in semiconductor unit prices. We will closely monitor this and carefully examine the impact on exports."

Imports during the same period increased by 21.8% to $65.37 billion. With exports slowing and imports rising sharply, last month's trade balance recorded a deficit of $4.8 billion, significantly widening from the previous month's deficit of $2.49 billion.

The Ministry of Economy and Finance stated, "We will make all-out efforts to stabilize livelihoods and prices, including measures for Chuseok holiday living expenses and flood damage recovery, while strengthening efforts to boost private economic vitality and manage risks. We will also accelerate structural reform tasks by sector."