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 last month slid below zero as exports from South Korea, a bellwether for world trade especially in 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.
Photo: EPA-EFE
“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 Societe Generale Securities in Seoul. “South Korea’s numbers could prove to be a precursor for Germany doing worse in inflation than other eurozone countries.”
While South Korean policymakers are keen to play down the 0.4 percent drop in prices 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 (BOK) to lower rates again.
South Korea’s 11.7 percent fall in exports last month included a 32 percent shrinking of semiconductor shipments and a 22 percent drop in exports to China.
The figures tell the story of a continued deceleration of growth in China amid trade tensions with the US and softness in demand for tech-related products.
South 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 that price growth would pick up toward 1 percent again next year.
However, he also said downside risks stemming from the global slowdown are making it hard for the central bank to maintain its 2.2 percent growth projection for this year.
Most economists see the central bank easing this month or next month. The bank lowered its interest rate in July for the first time in three years, to 1.5 percent, which is just 25 basis points above a record low. The BOK opted to hold in August.
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