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Thu, June 1, 2023 | 11:00
Economy
External risks weigh on Korea's economic recovery
Posted : 2022-01-21 17:06
Updated : 2022-01-22 09:35
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Electronic signboards in a Hana Bank dealing room in Seoul show intra-day trading of the benchmark KOSPI, the won-dollar exchange rate and the tech-heavy KOSDAQ, Friday. Yonhap
Electronic signboards in a Hana Bank dealing room in Seoul show intra-day trading of the benchmark KOSPI, the won-dollar exchange rate and the tech-heavy KOSDAQ, Friday. Yonhap

US, China factors destabilize markets, dampen Korea's growth momentum

By Yi Whan-woo

The Korean economy is off to a rocky start in 2022.

Asia's fourth-largest economy faces multiple downside risks ― including China's economic slowdown and U.S. inflation ― which are rattling financial markets and fueling concerns over a full-fledged recovery.

The risks are mainly associated with tightening U.S. monetary policy and a conspicuous slowdown in China's economic growth. These factors, along with international oil prices surging to a seven-year high, are viewed as the cause of the instability in the stock market, exchange rate and other economic barometers.

For instance, the benchmark KOSPI has been taking a beating so far this year, falling below the psychologically significant 3,000-point mark.

The won-dollar exchange rate has mostly been hovering around the worrying threshold of 1,200.

Consumer prices are forecast to trend upward after growing at the fastest pace in 10 years in 2021.

"And I am afraid all this instability of the economic barometers can hamper the country's targeted annual growth set at the low 3-percent range," Lee Sang-ho, head of the Korea Economic Research Institute's (KERI) economic policy team, said Friday.

He noted that the Ministry of Economy and Finance had projected Korea's economy to grow 3.1 percent in 2022 and that the Bank of Korea (BOK) anticipates a 3 percent expansion.

The KERI researcher forecast the KOSPI's relatively sluggish performance compared to 2021 to continue, as the U.S. Federal Reserve is on track to speed up tapering and rate hikes to tame inflation.

The Fed's move led to a sharp increase in 10-year U.S. Treasury yields, and accordingly, weighed on investor sentiment for the KOSPI.

The benchmark stock index has remained in the 2,800-point range since Jan. 17, falling from the 2,900-point range earlier this year. The last time it reached the 3,000-point mark was on Dec. 28.

The won's depreciation, according to a BOK report released on Jan. 18, is more extreme than other currencies, due to multiple factors in addition to the Fed's faster-than-expected tapering.

Among these factors were China's economic slowdown, possibly in the 5-percent range for the first time in 20 years ― other than in 2020 due to the COVID-19 pandemic ― and rising prices of raw materials.

The report stated that the cost volatility of raw materials affects the balance of trade ― especially considering that Korea's economy is heavily reliant on exports ― and the won's gain or loss of ground against the dollar.

The fact that China accounts for one-fourth of Korea's overall trade contributes to a dip in the won's value over the strong dollar.

"The country needs to keep a close eye on external risks, including U.S. inflationary risks, international raw material prices and China's slowdown, while beefing up its monitoring of global fund flows," the BOK said.

Separate data released by Statistics Korea showed consumer prices rising 2.5 percent in 2021 from a year earlier.

It was the steepest year-on-year rise since 2011, when consumer inflation spiked 4 percent.

The 2021 reading was higher than the 2.3-percent growth forecast by the BOK as well as the 2.4-percent projection by the Ministry of Economy and Finance.

On a monthly basis, consumer prices grew 3.7 percent in December from a year ago, seeing inflation rise for three straight months.

International oil prices rose to their highest since 2014, Tuesday. They included Brent crude, which broke $88 per barrel, and West Texas Intermediate crude futures, which stood at $85.74 per barrel.

Joo Won, a senior economic researcher at Hyundai Research Institute, warned of prolonged instability in most of the aforementioned economic barometers.

He pointed out the fact that the OECD's leading indicator for Korea fell for the fifth consecutive month in December, meaning that the nation's economy will likely lose growth momentum further in the months to come.

In the index, the composite leading indicator (CLI) gauges how an economy will fare four to six months ahead, based on industrial output, gross domestic product, and housing and financial market conditions.


Emailyistory@koreatimes.co.kr Article ListMore articles by this reporter
 
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