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South Korea’s first experience of falling prices is the latest signal of the strains felt by trade-dependent economies across the globe as they battle to support growth despite plunging exports.
Inflation slid below zero in September as exports from Korea, a bellwether for world trade especially in the the tech sector, racked up another double-digit drop to fall for the 10th straight month. The figures follow data showing price growth in Germany, another exporting powerhouse, weakening to the lowest level in nearly three years as it struggles to rediscover economic momentum.
“Disinflation in a country that depends on global trade is a sign that deepens concerns about a long-term global slump,” said Oh Suk-tae, an economist for SG Securities in Seoul. “South Korea’s numbers could prove to be a precursor for Germany doing worse in inflation than other eurozone countries.”
The U.S.-China trade war and a continuing slump in tech demand are continuing to darken the prospects for global growth with the world’s biggest exporters among the hardest-hit economies. Despite a wave of new stimulus by central banks in the form of interest rate cuts, a lack of global demand is putting downward pressure on inflation in a cycle that could be reinforced if key global component and product suppliers keep lowering their prices.
While South Korean policy makers are keen to play down the 0.4% drop in prices in September as a statistical blip rather than presenting a real risk of deflation, the latest figures are likely to increase pressure on the Bank of Korea to lower rates again. Australia, a major exporter of commodities to economies including China’s, cut its rates Tuesday for the third time this year, as it too tries to address the risks facing its economy.
South Korea’s 11.7% fall in exports in September included a 32% shrinking of semiconductor shipments and a 22% drop in exports to China. Those figures tell the story of a continued deceleration of growth in China amid the trade tensions and the ongoing softness in tech-related demand. Korea’s relentless falls in exports and price weakness have squeezed private investment by companies and inflation expectations among households.
Unusually high food prices last year are part of the reason the inflation numbers look soft now, a factor that has given government officials reason to downplay the risk of price falls becoming entrenched. BOK Governor Lee Ju-yeol last week dismissed concerns of deflation as “excessive,” saying price growth will pick up toward 1% again next year. But he also said downside risks stemming from the global slowdown are making it hard for the central bank to maintain its 2.2% growth projection for this year.
“At a time economic momentum is stalling across the board, the bank will naturally have to lower its rates in October,” said Kong Dong-rak, an analyst for Daishin Securities, pointing to the need for the BOK to take action to prop up the economy.
Most economists see the central bank easing in October or November. The bank lowered its interest rate in July for the first time in three years, to 1.5%, which is just 25 basis points above a record low. The BOK opted to hold in August.
While South Korea has grappled with below-target inflation for most of the last few years, unlike Japan, it has managed to stave off falling prices--until now. But it shares some of the structural problems of its neighbor that keep price pressures muted.
South Korea’s aging population and falling potential growth are two challenges that raise the risk of structural deflation in the long term.
“Over the much longer run, however, Korea’s ticking demographic time-bomb does raise the spectre of structural deflation — but we aren’t there yet,” said Miguel Chanco, a senior Asia economist at Pantheon Macroeconomics.
Economists also stressed that while the Korean economy is highly exposed to the currents of global trade and could disrupt many tech-related industries if its supplies were affected, it is in little position to dictate global prices. That means its falling prices are a reflection of what is happening globally, without necessarily being a cause for deflation elsewhere.
“South Korea is a price taker, meaning it’s vulnerable to price swings in the global economy rather than vice versa,” said Hong Sung-wook, a senior researcher at the Korea Institute for Industrial Economics and Trade. “That said, South Korean chipmakers seem to be keeping prices low abroad to maintain market share even though they could raise them if they wanted to.”
What Bloomberg’s Economist Says
“Record-low inflation and easing from the U.S. Federal Reserve give the central bank room to bring the policy rate back down to its record low of 1.25% -- and possibly even lower.”
Justin Jimenez, economist
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