US Stagflation Coming...? Experts Say "It's Still Premature"

Sticky liquidity and GDP growth below expectations
Not yet a stage to worry about stagflation
Low Q1 growth rate is temporary... possible rebound
US consumption capacity decline may cause sluggishness

Concerns about stagflation (economic stagnation accompanied by rising prices) have emerged as the US first-quarter growth rate, which had been showing solitary growth, unexpectedly faltered. However, many experts believe it is premature to diagnose stagflation at this point.

The preliminary estimate of the US first-quarter Gross Domestic Product (GDP) growth rate, released on the 25th (local time), was 1.6% annualized, significantly below the market expectation of 2.5%. On the same day, the first-quarter Personal Consumption Expenditures (PCE) price index rose 3.4%, up from 1.8% in the previous quarter, and the core PCE price index was 3.7%, exceeding the initial market forecast of 3.4%. With sticky inflation and GDP growth falling short of expectations, concerns about stagflation surfaced in the market.

However, experts argue that concerns about stagflation at this stage are excessive. There is still room for the US growth rate to rebound. Professor Seok Byung-hoon of Ewha Womans University’s Department of Economics pointed out, "The low GDP growth rate in the first quarter is temporary," adding, "Housing investment, a strong leading indicator of the US economy, showed double-digit growth, so the growth rate could increase significantly next quarter." He further noted, "If companies increase inventory investment or government spending rises due to President Biden’s re-election, the US GDP growth rate could rise."

There is also an opinion that the first-quarter results do not indicate a slowdown in growth. Economist Park Sang-hyun of Hi Investment & Securities said, "The US first-quarter GDP growth rate was largely influenced by a significant increase in imports," adding, "A large volume of imports means high related demand, so it is not yet a stage to worry about a slowdown in growth."

Although there was a growth rate gap between South Korea and the US in the first quarter, it is assessed that there will be little impact on the Korean economy. Economist Park pointed out, "If stagflation materializes, exports to the US could be hit," but added, "The first-quarter growth rate weakness is likely temporary, so it is difficult to assign much significance to the growth rate gap between South Korea and the US."

However, there is also a view that the US economy will not be the same as before. Professor Kim Young-ik of Sogang University’s Department of Economics evaluated, "Until last year, the US economy was optimistic enough to be described as Goldilocks or No landing," adding, "At that time, excessive consumption significantly reduced households’ consumption capacity compared to before." Regarding the first-quarter growth rate indicator, he said, "Because household savings rates are low and real disposable income is low, consumption is expected to gradually slow down," and predicted, "As a result, the US will show negative growth in the second quarter."

Professor Kang In-soo of Sookmyung Women’s University’s Department of Economics also said, "Stagflation implies economic recession, but it is difficult to define the current situation as a recession," while acknowledging, "However, signs of economic slowdown in the US are confirmed."

If the US economy weakens, it is suggested that the timing of South Korea’s interest rate cuts may precede that of the US. Professor Seok said, “The core inflation rate in South Korea is much lower than in the US, and the consumer price index is also lower in Korea than in the US,” adding, “In the long term, the won-dollar exchange rate will decline and inflation will fall faster, so it would not be unreasonable to cut interest rates first.” Professor Kang also explained, "The external environment in the second half of the year is unlikely to turn unfavorable for South Korea," and said, "If the global market remains stable in areas such as oil prices, it will be necessary to send a signal to stimulate the economy through interest rate cuts."