[Weekly Review] Yoon Administration's First Budget Code is 'Sound Fiscal Management'... Record Trade Deficit, Decline in Production, Consumption, and Investment

Yoon Administration's First Budget Increases by 5.2% to 639 Trillion Won... Shift to Sound Fiscal Management
Less Purchasing, Inventory Builds Up... August Inflation Rate Slows to 5% Range, but It's Too Early to Judge the 'Peak'

[Asia Economy Sejong=Reporter Kwon Haeyoung] The Yoon Seok-yeol administration has prepared next year's budget at 639 trillion won, a 5.2% increase from this year. This is a clear signal of a shift from the expansionary fiscal policy of the past five years under the Moon Jae-in administration to a sound fiscal policy. The trade deficit in August approached 10 billion dollars, marking the worst deficit in 66 years since 1956. The consumer price inflation, which had been soaring, slowed down last month for the first time in seven months. Production, consumption, and investment all declined in July, recording a 'triple decrease' for the first time in three months, spreading concerns about an economic slowdown.

Yoon Government's First Budget Increases 5.2% to 639 Trillion Won... Shift to Sound Fiscal Policy

According to the '2023 Budget Proposal' prepared by the Ministry of Economy and Finance, next year's budget is 639 trillion won, a 5.2% increase compared to this year's main budget (607.7 trillion won). The total expenditure growth rate in the first year of the Yoon administration's budget formulation is 3.5 percentage points lower than the average during the Moon administration period (2018-2022) of 8.7%. Compared to the second supplementary budget, this is the first time in 13 years since 2010 that the national budget has been reduced by 6% in a single year.

The budget for health, welfare, and employment is 226.6 trillion won, up 4.1% (8.9 trillion won) from the previous year. Despite the shift to a sound fiscal policy, the welfare budget for building social safety nets and supporting vulnerable groups has increased. The government allocated 31.6 trillion won and 26.6 trillion won respectively for protecting socially disadvantaged groups through the largest-ever increase in the median income standard (5.47%), moving expenses and deposit support for residents of semi-basements and gosiwon (small rooms), and raising the basic pension for the elderly.

On the other hand, the budget for social overhead capital (SOC) next year was cut by about 10% compared to this year, and major projects from the previous administration, such as job creation budgets, were drastically reduced, implementing large-scale structural adjustments. The government's budget restructuring scale for next year is 24 trillion won, the largest ever.

The government plans to strengthen fiscal soundness, which deteriorated rapidly during the COVID-19 recovery process. Currently, the national debt is approaching 1,070 trillion won, which is 50% of the gross domestic product (GDP).

August Trade Deficit Approaches 10 Billion Dollars... Worst in 66 Years Since Statistics Began

[Image source=Yonhap News]

According to the 'August Export-Import Statistics' released by the Ministry of Trade, Industry and Energy, the trade balance recorded a deficit of 9.47 billion dollars last month. This is the largest deficit in 66 years since trade statistics began in 1956.

Exports reached a record high for August at 56.67 billion dollars, with major export items such as petroleum products, automobiles, steel, and secondary batteries achieving their highest monthly figures ever. However, imports in August rose 28.2% year-on-year to 66.15 billion dollars. The increase was largely due to energy imports such as crude oil and gas, which amounted to 18.52 billion dollars, up 8.86 billion dollars (91.8%) from the previous year. The sharp rise in energy imports, along with global interest rate hikes led by the United States, prolonged Russia-Ukraine war causing supply shortages of global raw materials, and weakening global demand, are cited as the main factors worsening the trade balance.

The worsening trade environment due to the global economic downturn makes it difficult to expect a rebound. Semiconductors, the representative export item, recorded 10.78 billion dollars last month, down 7.8% year-on-year, marking the first negative growth in 26 months since June 2020 (-0.03%). The trade balance with China recorded a deficit of 380 million dollars last month, marking four consecutive months of deficit for the first time in 30 years since establishing diplomatic relations in 1992.

The cumulative trade deficit this year reached 24.7 billion dollars by last month, surpassing the previous annual record deficit of 20.6 billion dollars in 1996 in just eight months.

Less Buying, Inventory Builds Up... July Production, Consumption, Investment 'Triple Decrease'

Production, consumption, and investment all declined in July, recording a 'triple decrease' for the first time in three months, raising concerns about an economic slowdown. In particular, overall manufacturing production centered on semiconductors decreased due to weak demand caused by China's lockdowns, and the inventory rate soared to the highest level in two years and two months, indicating that concerns are gradually becoming reality.

According to the 'July Industrial Activity Trends' released by Statistics Korea, the retail sales index (seasonally adjusted), which indicates consumption trends in July, was 117.9 (2015=100), down 0.3% from the previous month.

In addition to consumption, both production and investment decreased, marking the first time in three months since April. The total industrial production index (seasonally adjusted, excluding agriculture, forestry, and fisheries) in July was 117.9 (2015=100), down 0.1% from the previous month. Facility investment decreased by 3.2% compared to the previous month.

Due to high inflation and concerns about economic slowdown, people are buying less, causing inventories to accumulate. The manufacturing inventory rate was 125.5%, the highest in two years and two months since May 2020. The semiconductor inventory rate rose 12.3% from the previous month and soared 80.0% year-on-year. As inventories piled up, the manufacturing operating rate index also decreased by 1.6%.

Concerns about the economic outlook are growing due to inflation and interest rate hikes. The leading composite index cyclical component (99.4), which indicates future economic trends, fell below 100, and the consumer sentiment index in August (88.8) also remained below 90. This reflects a decline in expectations for economic trends amid growing concerns about economic slowdown due to high-intensity tightening in major countries such as the United States.

An official from the Ministry of Economy and Finance said, "External difficulties such as global inflation, economic slowdown, and interest rate hikes continue, increasing uncertainty about future economic trends. The slowdown in export growth due to global downward pressure on the economy, semiconductor price declines, and increased manufacturing inventories may act as burdens on the production recovery trend."

August Inflation Rate Slows to 5% Range... Too Early to Judge 'Peak'

According to the 'August Consumer Price Trends' released by Statistics Korea, the consumer price index last month was 108.62 (2020=100), up 5.7% compared to the same month last year. This is 0.6 percentage points lower than the inflation rate in July (6.3%). It is the first time in seven months since January that the inflation rate's increase has slowed compared to the previous month.

Personal service prices rose 6.1% last month, with dining-out prices jumping 8.8%, marking the highest increase in about 30 years since October 1992 (8.8%).

The overall prices of agricultural, livestock, and fishery products rose 7.0%. Vegetable prices surged 27.9% compared to the same month last year, and livestock product prices, which applied a zero tariff on imported beef and other livestock products, also rose 3.7%. Petroleum prices rose 19.7%, but compared to the previous trend of soaring into the 30% range, it appears relatively subdued.

The living cost index, which reflects perceived inflation, rose 6.8%, and the core inflation rate (excluding agricultural products and petroleum) rose 4.4%, showing the underlying trend of inflation.

Since price fluctuations largely depend on external variables such as international oil prices, it is difficult to easily judge whether the 'peak' has been reached. The Ministry of Economy and Finance stated, "There are persistent inflationary risks such as increased demand during the holiday season and volatility in international raw material prices. We will not lower our guard and will continue all policy efforts."

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