Slowed Growth, Soaring Prices: "War-Induced Stagflation Is Coming"

Hyundai Economic Research Institute, Recent Economic Trends and Business Condition Report
"Leading Indicators Declining Amid Economic Recovery"
① Possibility of Growth Slowdown and High Inflation Entry
② Causes of High Inflation: Cost Increase → Demand Increase
③ Stabilization Period Following Omicron Wave

An attendee at a rally held on the 5th (local time) in Manhattan, New York, USA, opposing Russia's invasion of Ukraine, is holding a photo of Russian President Vladimir Putin.

[Asia Economy Reporter Choi Dae-yeol] It has been pointed out that stagflation, where slow growth coincides with high inflation, could emerge domestically due to the direct and indirect ripple effects of Russia's invasion of Ukraine. This suggests the possibility of entering a recession phase similar to the early days of COVID-19 amid overlapping negative conditions such as the Omicron pandemic.

Joo Won, Head of Economic Research at Hyundai Research Institute, noted this in a report titled "Increasing Possibility of War-Induced Stagflation" released on the 6th. The report observed that although the domestic economy has recently been improving mainly in the domestic demand sector, various leading indicators suggest a potential economic downturn ahead.

The report anticipated that the aftermath of the Ukraine invasion would significantly impact the domestic economy. With Russia sanctions led by the US and Europe and Russia's countermeasures, global trade transactions are expected to shrink, and raw material prices are likely to continue soaring. Joo said, "There are concerns that our export economy may decline, and with increased raw material imports, the current account balance could worsen. Domestic prices are under strong upward pressure, which could dampen consumer and investment sentiment, causing a domestic market recession and making it difficult to rule out the possibility of entering a stagflation phase."

The Impact Pathways of the Ukraine-Russia War on the Korean Economy

Stagflation refers to a situation where economic growth slows down (slow) while high inflation (inflation) becomes prominent. It is used when the economic downturn is less severe than in stagflation, which denotes recession accompanied by high inflation. It remains a burden for our economy, which is highly influenced by external variables.

Additionally, the fact that rising prices are driven by increased demand rather than cost increases such as oil prices is also a concern. While price hikes over the past one to two years were largely due to rising import prices of raw materials like energy, recently, the core consumer price index excluding agricultural products and petroleum products has risen sharply. The report warned, "There is concern that the inflation structure is shifting from 'cost-push' to 'demand-pull.' If market demand surges following the endemic phase of COVID-19 and abundant liquidity effects from rapid fiscal expansion act together, high inflation could persist for a considerable time."

The recent Omicron wave is also a variable. The intensity of the wave has exceeded expectations, and its duration may be prolonged, potentially delaying economic recovery. Overseas cases in the US and EU show that it takes at least one to two months for the COVID-19 wave to peak and stabilize. Considering this, the report expects that the stabilization phase in Korea may only be possible after the end of next month, which could delay the recovery of domestic demand.

On the 4th, fuel price information is displayed at a gas station in Seoul amid rising oil prices due to Russia's invasion of Ukraine and other factors. Photo by Mun Ho-nam munonam@

Joo said, "In the first quarter, the Korean economy experienced an overall slowdown in recovery due to the Omicron pandemic and inflation, but so far, the export sector has maintained a recovery trend, acting as an economic safety net. While improvement is likely in the second quarter, there is also a possibility of economic re-recession due to downside risks such as war and price instability."

He added, "To settle into an economic recovery phase, it is necessary to review the overall export market situation and focus on strengthening response capabilities to supply issues of raw materials coming from conflict zones. Attention should also be paid to responding to instability in domestic and international financial markets and setting the direction of macroeconomic policies after the second quarter."

This content was produced with the assistance of AI translation services.