South Korea Inflation Hits Record Low as Trade Feuds Sap Demand

(Bloomberg) -- South Korea’s inflation fell to zero for the first time ever and economic growth was revised slightly lower, further dimming the outlook for an economy already hammered by trade battles and weakening global demand.

Consumer prices rose 0% in August from a year earlier, data from the statistics office showed Tuesday. Economists’ median estimate was for a 0.2% gain. Gross domestic product grew 2% in the second quarter from a year earlier, the Bank of Korea said in a statement. The preliminary estimate was 2.1%.

The uncertainty resulting from the U.S.-China trade war and South Korea’s own feud with Japan has deterred local companies from investing and hiring more, in turn weighing on domestic demand. The inflation and GDP readings come after data showed South Korea’s exports plunged 13.6% in August, extending the streak of contractions to nine months.

Key Insights

• “South Korea’s demand was already weak, and supply factors accelerated the slowdown in inflation,” said Ha Keon-hyeong, an economist at Shinhan Investment Corp. “Consumer prices can register negative movements until November, but prices will probably rebound to normal levels come December.”
• BOK Governor Lee Ju-yeol flagged weak inflation last week, saying high prices for agricultural goods last year could contribute to negative inflation for a few months. Lee said consumer price gains are expected to rebound to around 1% early next year.
• The BOK lowered its growth and inflation projections for 2019 to 2.2% and 0.7%, respectively, in July.
• While the BOK held rates Aug. 30, many economists expect another cut at its next meeting in October as weakening overseas demand and escalating trade battles darken the outlook for South Korea’s trade-dependent economy. The inflation data will bolster this view.
• Government spending was the biggest driver of GDP growth in the second quarter, as uncertainties damped private-sector activities. The finance ministry proposed a record budget for next year, partly to counter rising economic headwinds.

What Our Economists Say

“A challenging growth outlook and record low inflation in South Korea add to the case for more policy support from the Bank of Korea.”

--Justin Jimenez, associate

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• Consumer prices rose 0.2% in August from the previous month.
• Core inflation rose 0.9% from a year earlier.
• The finance ministry said Tuesday that lower prices for agricultural, livestock products shaved 0.59 percentage point from the headline inflation from a year earlier, while lower oil prices reduced 0.15 percentage point.
• GDP rose 1% in the second quarter from the previous three months, versus an initial estimate of 1.1%, revised data showed.
• Private consumption rose 0.7% in the second quarter from the previous three months, while government spending rose 2.2%.
• Construction investment increased 1.4%, as facilities investment expanded 3.2%.

To contact the reporters on this story: Jiyeun Lee in Hong Kong at jlee1029@bloomberg.net;Hooyeon Kim in Seoul at hkim592@bloomberg.net

To contact the editors responsible for this story: Malcolm Scott at mscott23@bloomberg.net, Henry Hoenig, Paul Jackson

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