[Weekly Review] Korea's 'Growth Engine' Hit by Oil Shock... Producer Prices Also Reach Record High

On the 17th, fuel price information was displayed at a gas station in Seoul. The domestic gasoline prices at gas stations have been declining for three consecutive weeks, showing signs of stabilization. According to Opinet, the fuel price information service of the Korea National Oil Corporation, the average gasoline price at gas stations nationwide during the second week of April (10th to 14th) was 1,977.2 KRW per liter, down 13.3 KRW from the previous week. Domestic gasoline prices had risen for 10 consecutive weeks from the beginning of the year until the end of last month, following international oil prices, reaching 2,004 KRW per liter, the highest in 10 years since 2012. Since then, due to factors such as the U.S.-led release of strategic reserves, the prices have shifted to a downward trend. Photo by Moon Honam munonam@

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[Asia Economy Sejong=Reporter Lee Jun-hyung] The trade deficit is likely to continue its deficit streak for the second consecutive month. This is due to the steady increase in energy import costs amid high oil prices, as well as the ongoing Ukraine crisis showing no signs of easing. The producer price index, a leading indicator of consumer prices, also hit its highest level in over five years.

According to the Korea Customs Service on the 23rd, the trade balance from the 1st to the 20th of this month was preliminarily recorded as a deficit of $5.199 billion. Imports rose 25.5% year-on-year to $41.5 billion, while exports increased by only 16.9% to $36.3 billion. Considering that the trade deficit during the same period last year was $2 billion, the deficit has more than doubled in the past year.

Looking solely at export growth rates, the performance is not bad. Key export items such as semiconductors (22.9%), petroleum products (82%), and automobile parts (3.9%) showed strong growth. Exports to major countries including the United States (29.1%), the European Union (12.3%), and Vietnam (37.2%) also increased compared to last year.

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The problem is that energy import costs are soaring. Among major import items, the import growth rates for the three main energy sources?crude oil (82.6%), gas (88.7%), and coal (150.1%)?stood out. This is due to the sharp rise in international energy prices caused by geopolitical conflicts such as the Ukraine crisis. In fact, as of last month, prices for major imported energy sources like crude oil (72%), gas (200%), and coal (441%) have risen significantly compared to a year ago.

China's lockdown policy is also acting as a negative factor for the trade balance. Recently, China locked down 45 major cities, including Shanghai, to curb the spread of COVID-19. As South Korea's largest trading partner, China's large-scale lockdown policy inevitably leads to export losses and a surge in raw material prices due to supply chain instability.

The likelihood of the trade balance recording a deficit for the second consecutive month has increased. Earlier, the trade balance turned positive in February this year, but due to the surge in energy prices, imports hit a record high last month, returning to a deficit within a month. With rising import price pressures caused by high oil prices, it is highly likely that the trade balance will continue to show a deficit this month as well.

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The producer price index hit its highest level in 5 years and 3 months. According to the Bank of Korea, the producer price index last month was 116.46 (2015=100 base), up 1.3% from the previous month. The producer price index has risen for three consecutive months since January this year.

The producer price index reflects price changes of goods and services supplied by domestic producers to the market. It typically affects consumer prices with about a one-month lag and is used as a leading indicator of the consumer price index. When producer prices rise, it means upward pressure on consumer prices also increases.

Last month, the domestic supply price index (121.99) also rose for the third consecutive month. It increased 2.3% month-on-month due to rises in raw materials (8%), intermediate goods (2%), and final goods (1.2%). The domestic supply price index measures price changes of goods and services supplied domestically, including imports. The total output price index (118.4), which adds exports to domestic shipments, rose 2.2% month-on-month, mainly driven by manufactured goods (3.4%).

Deputy Prime Minister Hong Nam-ki Meets with U.S. Treasury Secretary Janet Yellen
(Seoul=Yonhap News) Hong Nam-ki, Deputy Prime Minister and Minister of Economy and Finance, who is visiting Washington D.C., USA to attend the G20 Finance Ministers and Central Bank Governors Meeting, met with U.S. Treasury Secretary Janet Yellen at the International Monetary Fund (IMF) on the 20th (local time). April 21, 2022 [Provided by the Ministry of Economy and Finance. Redistribution and DB prohibited]
photo@yna.co.kr
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＜Copyright(c) Yonhap News Agency, Unauthorized reproduction and redistribution prohibited＞

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The government is also accelerating its accession to the Indo-Pacific Economic Framework (IPEF). IPEF is an economic cooperation initiative in the Indo-Pacific region promoted by the Biden administration in the United States. On the 20th, Deputy Prime Minister and Minister of Economy and Finance Hong Nam-ki met with U.S. Treasury Secretary Janet Yellen in Washington, D.C., and indicated South Korea's intention to participate in IPEF. During the meeting, Hong said, "South Korea is positively considering participation in the IPEF proposed by the U.S.," adding, "The Korean government will also work to encourage many ASEAN countries to join IPEF."

Hong also emphasized the need to legislate fiscal rules. After the G20 Finance Ministers' meeting held in Washington, D.C. on the 21st, Hong told accompanying reporters, "South Korea's national debt ratio is 50% this year, but it is expected to approach 60% within the next 5 to 6 years," and added, "The next government must legislate and introduce fiscal rules."

Previously, the government submitted a revision bill to the National Assembly at the end of 2020 to introduce Korean-style fiscal rules. According to the bill, the national debt ratio will be limited to within 60% of the annual gross domestic product (GDP) starting in 2025, and the integrated fiscal balance will be limited to within -3% of GDP. However, the bill submitted by the government is still pending in the National Assembly.

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