Inflation outlook hits all-time high as growth prospects dim

South Koreans expect prices to rise at a record level in the next 12 months and the economy to underperform, a Bank of Korea survey showed Wednesday, as the export-led economy faces shrinking growth over poor exports.

In a monthly survey of 2,500 households conducted July 11-18, consumers forecast inflation to average 4.7 percent, hitting its highest level since 2008 when the central bank began releasing the data. The all-time high, up from the previous 3.9 percent in June, also marked the largest monthly gain.

“The unusually high expectations have to do with the consumer price index in June,” said Hwang Hee-jin, head of the economic survey team at the bank, referring to the 6 percent annual increase that month, which marked a 24-year high.

Survey respondents tend to look at the latest consumer price index more seriously than rate hikes, according to the official, who noted most of the survey was done by the time the bank delivered its biggest single rate hike of 50 basis points on July 13.

“Consumers are not expecting inflation to ease later in the year,” Hwang said. The survey found more consumers bet on a rate hike than a cut in six months.

Meanwhile, consumers turned more pessimistic about their economic prospects. The index measuring how Koreans assess their living conditions and business activity currently and in six months dropped to 86 from 96.4 in June, falling since May this year and marking the lowest level since September 2020.

Koreans were increasingly bracing for worsening business activity in particular, according to the monthly report. Russia’s invasion of Ukraine, China’s slowdown, rate hikes by major economies and soaring prices all add to sapping consumer confidence, Hwang said.

The survey comes a day after the bank warned against the country’s worsening trade deficit, which it said could deal a blow to Asia’s fourth-largest economy, despite surprise economic growth in the second quarter.

Korea reported unexpected growth in the April-June period thanks to consumption prompted by the easing of COVID-19 rules, but momentum looks short-lived given a resurgence in COVID-19 cases and surging prices, the bank said.

According to Trade Ministry data, the trade deficit in the first half of this year reached $10.3 billion -- the largest level ever seen in the six-month period.

The International Monetary Fund on Tuesday revised Korea’s growth forecast this year to 2.3 percent from the previous 2.5 percent, citing downside risks from rising prices and the Ukraine war. For 2023, the estimate was cut to 2.1 percent from 2.9 percent.

The international group downgraded its global growth forecast this year to 3.2 percent from 3.6 percent, its April projection, saying a global recession could soon take place as a collision of crises disrupts major economies like the US, China and Europe.

By Choi Si-young (siyoungchoi@heraldcorp.com)

https://www.koreaherald.com/view.php?ud=20220727000804