[Weekly Review] Q1 0.7% Growth Raises 'S-Gongpo' Fear... Inflation Expectations Highest in 9 Years

Won-Dollar Exchange Rate Surpasses 1,270 Won for the First Time in 25 Months... Government Verbal Intervention Calms Upward Trend

[Image source=Yonhap News]

[Asia Economy Sejong=Reporter Kwon Haeyoung] Due to the Omicron variant COVID-19 pandemic and the Ukraine crisis, South Korea's economy grew by only 0.7% in the first quarter. The expected inflation rate, which is the consumer price inflation rate anticipated by consumers for the next year, exceeded 3%, marking the highest level in nine years. Amid the continued 'three highs (高)' phenomenon of high inflation, high interest rates, and high exchange rates, concerns are spreading that the fear of stagflation (economic stagnation with rising prices) may become a reality for our economy from the second quarter onward. Industrial production returned to an increasing trend after three months, but consumption and investment both declined, continuing an unstable economic recovery.

◆First quarter growth rate limited to 0.7%＝According to the Bank of Korea on the 30th, the real gross domestic product (GDP, preliminary figure) growth rate for the first quarter of this year was 0.7% quarter-on-quarter. As the Omicron wave peaked and private consumption and investment did not recover, the growth rate for the first quarter fell by 0.5 percentage points compared to the previous quarter.

Exports, which support our economy, continued to increase alone, but growth slowed as private consumption and investment retreated. Private consumption decreased by 0.5%, centered on semi-durable goods such as clothing and footwear, and services such as entertainment, culture, transportation, and food and accommodation. Construction investment and facility investment also decreased by 2.4% and 4.0%, respectively. At least exports increased by 4.1%, mainly in semiconductors and chemical products. The contribution of net exports to the first quarter growth rate reached 1.4 percentage points.

However, the future is problematic. The prolonged Ukraine crisis and the slowdown in China's economy may negatively affect exports, which have supported our economy so far. Due to the sharp rise in raw material prices and supply chain disruptions, achieving the annual growth rate target of 3.0% this year is expected to be difficult.

◆Expected inflation at 3.1%, highest in 9 years... Housing price outlook also rises＝The expected inflation rate is also soaring. According to the 'April Consumer Survey Results' released by the Bank of Korea, the expected inflation rate this month rose by 0.2 percentage points from the previous month to 3.1%. This is the highest figure in nine years since April 2013 (3.1%). The price perception index, which is an indicator of consumer price inflation over the past year, also recorded 3.2%, the highest since April 2013, up 0.3 percentage points from the previous month.

The interest rate level outlook index (141) rose by 5 points from the previous month due to rising market interest rates and inflation concerns, reaching an all-time high. The housing price outlook index (114) increased by 10 points in one month due to eased real estate regulations and growing development expectations.

This month's Consumer Confidence Index (CCSI) recorded 103.8, up 0.6 points from the previous month. The consumer confidence index fluctuated depending on the increase in COVID-19 cases and the easing of quarantine measures but has been rising for two consecutive months. The consumer confidence index is based on a standard value of 100; a value above 100 indicates optimism compared to the long-term average, while below 100 indicates pessimism.

◆Won-Dollar exchange rate surpasses 1,270 won＝This week, the won-dollar exchange rate surpassed 1,270 won per dollar for the first time in 25 months. On the 28th, in the Seoul foreign exchange market, the won-dollar exchange rate closed at 1,272.5 won per dollar, up 7.3 won from the previous day's closing price. It surpassed the 1,260 won level on the 27th and then exceeded 1,270 won just one day later. The last time the won-dollar exchange rate closed above 1,270 won per dollar was on March 19, 2020 (1,285.7 won), when the financial market was shocked at the early spread of COVID-19, marking 25 months ago. The causes are attributed to the continued global inflation trend, the U.S. tightening stance, and the prolonged Russia-Ukraine crisis.

The won-dollar exchange rate, which had surged to the 1,270 won level, closed at 1,255.9 won on the 29th, down 16.6 won from the previous day. This was influenced by the simultaneous strength of Asian stock markets and currencies, as well as the government's increased verbal intervention and the market's anticipation of 'direct intervention'?selling or buying dollars directly in the foreign exchange market. Earlier, Deputy Prime Minister and Minister of Economy and Finance Hong Namki stated, "We will make efforts to stabilize the market if necessary," followed by First Vice Minister Lee Eogwon of the Ministry of Economy and Finance, who said, "We will maintain the principle of implementing market stabilization measures if rapid market imbalances occur," indicating the possibility of government intervention.

◆Industrial production up 1.5%... Consumption and investment both decline＝Industrial production increased, but consumption and investment both declined, continuing an unstable economic recovery trend. According to the 'March Industrial Activity Trends' released by Statistics Korea, the seasonally adjusted total industrial production index (excluding agriculture, forestry, and fisheries) in March was 117.1 (2015=100), up 1.5% from the previous month. After two consecutive months of decline in January (-0.3%) and February (-0.3%) this year, it turned to an increasing trend after three months. Service industry production increased by 1.5%, and manufacturing and other mining and industrial production rose by 1.3%, marking six consecutive months of growth. This is the longest period since July 2010.

However, expenditure-related indicators showed that the domestic demand recovery base remains unstable. The retail sales index (seasonally adjusted), which indicates consumption trends, was 120.1 (2015=100) in March, down 0.5% from the previous month. Facility investment decreased by 2.9% as investments in machinery and transportation equipment both declined. This was due to supply disruptions caused by the suspension of factory operations of local partners in major Chinese cities due to lockdown measures. Construction investment also continued a sluggish trend as rising construction material prices affected construction schedules.

The coincident index of economic indicators, which reflects the current economy, was 102.4, down 0.2 points from the previous month, marking a decline for the first time in six months. The leading index of economic indicators, which predicts future economic conditions, was 99.5, down 0.3 points, continuing a decline for nine consecutive months. Deputy Prime Minister and Minister of Economy and Finance Hong Namki diagnosed, "The slight decline in the coincident index after six months can be seen as a sign that the uncertainty of the economic recovery trend is increasing amid difficult external conditions, requiring special caution and vigilance."

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