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Growth is slowing and prices remain stubbornly high, sending economic experts scratching their heads and trying to figure out if it is a sign of forthcoming stagflation. But the administration and the central bank rule out the possibility of the economy slipping into stagflation, saying that growth will regain momentum and prices will be more stable in the months ahead.
Gross domestic product grew 3.4 percent year-on-year during the second quarter of this year, the lowest in one year and nine months. Growth had been slowing from 4.7 percent in the final quarter of last year to 4.2 percent in the first quarter of this year.
Still worse, real gross domestic income, the sum of all income earned, declined for the two consecutive months ― 0.3 percent in the first quarter and 0.1 percent in the second quarter ― the first in two years. It was a consequence of the nation’s worsening terms of trade.
Despite the lackluster 3.8 percent growth during the first half, the administration is confident that its revised 2011 growth target of 4.5 percent is attainable. The administration, which had initially aimed at generating 5 percent growth, later lowered the target as the consumer price index continued to surpass the 4 percent level. It also decided to keep the consumer price index from rising above the 4 percent level.
The administration’s optimism that growth will accelerate in the second half is not shared by business enterprises and economic think tanks.
On one hand, a survey of 1,161 manufacturers by the Bank of Korea paints a bleak picture for the business community. Its July business survey index is at 91, the same as in June, with a reading below 100 meaning companies expecting business conditions to worsen outnumber those predicting improvement.
On the other hand, the Korea Economic Research Institute believes growth will be higher in the second half than in the first half, but not by a large margin. It forecasts that the two halves will even out at 4.1 percent, substantially lower than the administration’s revised growth target.
If so, the administration is well advised to lower its growth target again and focus on reining in inflation, instead of attempting in vain to catch the two hares running in the opposite directions. Otherwise, it will find it extremely difficult to make good on its promise to stabilize consumer prices.
The administration has recently agreed with the central bank to place top priority on price stability. Now they will have to demonstrate their commitment by taking concrete measures.
One such measure is for the administration to keep itself from intervening in the foreign exchange market. The Korea Federation of Small and Medium Business, a lobby for small- and medium-sized companies, says the won-dollar exchange rate has dropped well below the level of 1,119 won per dollar that is tolerable to its members. The federation is pressuring the administration to intervene in the market, saying that some of its members have started to give up exports.
The exchange rate, which fell below the level of 1,060 won per dollar three weeks ago, is likely to drop to 1,000 won per dollar within a year, according to a forecast by a foreign bank. Though a falling rate hinders exports and, by doing so, stunts growth, it helps to curb consumer prices by lowering import prices. Given that a 10 percent decline in the exchange rate is estimated to pare 0.5 percentage points off the consumer price index, the administration should keep itself from rushing to intervene when the exchange rate falls sharply, as it has done in the past.
Moreover, the current level of exchange rate is endurable to many exporting manufacturers, as evidenced by ever-increasing exports. The nation’s June exports reached $48.69 billion, the largest ever. Better still, the current account surplus was at $3.66 billion, up $2.03 billion from the previous month.
With the consumer price index remaining well above the targeted 4 percent level, the administration, and the central bank for that matter, cannot afford to slacken their vigilance against inflation. Moreover, inflationary pressure is building as the prices of perishables are rising ― a consequence of the long spell of rainy weather.
Gross domestic product grew 3.4 percent year-on-year during the second quarter of this year, the lowest in one year and nine months. Growth had been slowing from 4.7 percent in the final quarter of last year to 4.2 percent in the first quarter of this year.
Still worse, real gross domestic income, the sum of all income earned, declined for the two consecutive months ― 0.3 percent in the first quarter and 0.1 percent in the second quarter ― the first in two years. It was a consequence of the nation’s worsening terms of trade.
Despite the lackluster 3.8 percent growth during the first half, the administration is confident that its revised 2011 growth target of 4.5 percent is attainable. The administration, which had initially aimed at generating 5 percent growth, later lowered the target as the consumer price index continued to surpass the 4 percent level. It also decided to keep the consumer price index from rising above the 4 percent level.
The administration’s optimism that growth will accelerate in the second half is not shared by business enterprises and economic think tanks.
On one hand, a survey of 1,161 manufacturers by the Bank of Korea paints a bleak picture for the business community. Its July business survey index is at 91, the same as in June, with a reading below 100 meaning companies expecting business conditions to worsen outnumber those predicting improvement.
On the other hand, the Korea Economic Research Institute believes growth will be higher in the second half than in the first half, but not by a large margin. It forecasts that the two halves will even out at 4.1 percent, substantially lower than the administration’s revised growth target.
If so, the administration is well advised to lower its growth target again and focus on reining in inflation, instead of attempting in vain to catch the two hares running in the opposite directions. Otherwise, it will find it extremely difficult to make good on its promise to stabilize consumer prices.
The administration has recently agreed with the central bank to place top priority on price stability. Now they will have to demonstrate their commitment by taking concrete measures.
One such measure is for the administration to keep itself from intervening in the foreign exchange market. The Korea Federation of Small and Medium Business, a lobby for small- and medium-sized companies, says the won-dollar exchange rate has dropped well below the level of 1,119 won per dollar that is tolerable to its members. The federation is pressuring the administration to intervene in the market, saying that some of its members have started to give up exports.
The exchange rate, which fell below the level of 1,060 won per dollar three weeks ago, is likely to drop to 1,000 won per dollar within a year, according to a forecast by a foreign bank. Though a falling rate hinders exports and, by doing so, stunts growth, it helps to curb consumer prices by lowering import prices. Given that a 10 percent decline in the exchange rate is estimated to pare 0.5 percentage points off the consumer price index, the administration should keep itself from rushing to intervene when the exchange rate falls sharply, as it has done in the past.
Moreover, the current level of exchange rate is endurable to many exporting manufacturers, as evidenced by ever-increasing exports. The nation’s June exports reached $48.69 billion, the largest ever. Better still, the current account surplus was at $3.66 billion, up $2.03 billion from the previous month.
With the consumer price index remaining well above the targeted 4 percent level, the administration, and the central bank for that matter, cannot afford to slacken their vigilance against inflation. Moreover, inflationary pressure is building as the prices of perishables are rising ― a consequence of the long spell of rainy weather.
