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Bank of Korea (BOK) Governor Rhee Chang-yong pauses before answering a question at a press briefing, after the central bank hiked its key interest rate by a quarter percentage point to 1.75 percent, May 26. It was the BOK's first back-to-back rate increase in 15 years. Yonhap |
Record-high inflation rate, sagging exports back pessimistic views for growth
By Kim Bo-eun
HONG KONG ― Korea's export-oriented economy faces an approaching global recession, experts warned Wednesday. The dire projection comes at a time when Korea is witnessing the highest level of inflation in decades, amid weak export growth.
The consumer price index for June was up 6 percent year-on-year, which is the highest seen since November 1998 at the height of the Asian financial crisis.
Korea also suffered a $10.3 billion trade deficit in the first half of this year, which was the highest level in 25 years.
Korea managed to achieve 0.7 percent quarter-on-quarter growth in the first three months of this year, but the following quarters are projected to display significantly weaker growth.
"Growth for the second quarter will be much weaker, due to China's lockdown," said independent economist Andy Xie, referring to Shanghai's lockdown from April to May that disrupted supply chains and slowed demand in the mainland.
Nomura forecast Korea's economy to contract by 2.2 percent in the third quarter. It also projected major economies, including Korea, to enter a recession in the next 12 months as central banks around the world battle inflation. A recession is defined as two consecutive quarters of GDP contraction.
Last month, the OECD cut its growth projection for Korea this year to 2.7 percent, down from an earlier forecast of 3 percent. The organization cited both downside risks to domestic demand and sagging exports.
Xie offered a much more pessimistic view, stating that the country's growth rate will be "quite close to zero" this year.
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Prices are marked for vegetables at a traditional market in Seoul, July 3. Yonhap |
Recovering demand in China ― Korea's largest trading partner ― and an expected boost coming from Beijing's fiscal policies have been cited as possible buffers against the expected effects of inflation and recession.
But Xie said the world's No. 2 economy is far from a rebound.
"The market is talking about a big stimulus in China. In my opinion, it is hot air. China isn't doing much," he said, adding that the property bubble is deflating. "The drag on (China's) economy will take many years to work out."
ING Senior Economist Kang Min-joo said next year will be more worrisome for Korea.
"As the year-end approaches, tighter monetary conditions both at home and abroad are expected to have some negative impacts on consumption and investment," she said. "We expect GDP growth to decelerate sharply next year."
Korea's benchmark KOSPI closed below the 2,300 mark on Wednesday, for the first time since Oct. 30, 2020, amid an extended downward trajectory.
Herald van der Linde, head of Asia Pacific Equity Strategy at HSBC, said weaker growth in the U.S. and Europe is also bad news for exporters, such as Korean tech companies that sell products in those markets.
"Their earnings will come under pressure. This is driving Korean stocks lower at the moment. For markets to recover, we need to see evidence that Korean earnings can hold up or improve," he said.
Given the current underweight position of overseas investors, van der Linde said signs of strong earnings would likely benefit the market.
"If there is good news on Korean earnings, and the market recovers at some point in time, foreign funds will need to rush into Korean equities to build overweight positions again."
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Cargo is unloaded at a port in the southeastern city of Busan, June 21. Yonhap |
The Korean currency slid to the lowest level against the U.S. dollar in 13 years on Wednesday, closing at 1,306 won against the dollar.
Korea's foreign currency reserves in June fell to the lowest level since the 2008 global financial crisis, as authorities sold dollars to defend the plunging value of the won.
But experts said the won's depreciation would be less of a concern in the months ahead.
"The Korean won's weakening trend is likely to continue in the third quarter of this year, but the rate of depreciation will be somewhat limited compared to the first half of 2022," Kang said.
She referred to the light position of foreign investors in the local equity market, following six months of net selling.
"We expect the won to stabilize by the year end, when the market expects the Fed to slow rate hikes and enter an easing cycle by mid-2023," she said.
Xie said, "Asian currencies are coming down for the time being, but would be strong over time due to a high savings rate and current account surplus."