World Economy

S. Korea May Enter Stagflation by Yearend

Household debt will stand between 1,380 and 1,540 trillion won by the end of this year.Household debt will stand between 1,380 and 1,540 trillion won by the end of this year.

South Korea’s household debt is increasing steeply, with some estimating it to reach 1,500 trillion won ($1.31 trillion) by the end of this year. While snowballing household debt is weighing on consumption, some analysts warn that the possibility of stagflation is growing, putting more downward pressure on both consumption and investment.

The Hyundai Research Institute estimated in a report that household debt will stand between 1,380 and 1,540 trillion won by the end of this year, depending on variables such as gross domestic product, consumer prices and the housing price index, Yonhap reported.

It means that each household will be shouldering a debt on average of 78 million won, and each Korean 29 million won. The ratio of household debt to disposable income will also soar to between 150 and 168%.

Households in marginal conditions that spend more than 40% of their disposable income to pay back debt and have more debt than assets are also increasing. The ratio of such households rose to 14.8% in 2015 from 12.3% in 2012. They could sustain themselves on low interest rates, but rising rates are coming as a threat.

Researchers agree that the government’s real estate policy is behind the snowballing debt. “With mortgages taking around 60% of household debt, it is difficult to cope with the debt while boosting real estate prices,” Jo Gyu-rim, a researcher at the institute said.

It also warned that the country may enter stagflation as consumer prices have been rising steeply recently despite the sluggish economy. Consumer prices rose over 2% in January for the first time in four years and three months.

“Oil and the prices of other resources have been rising, adding to inflationary pressure. As Korea is a small and open economy heavily relying on imports for resources, changes in international prices will have a huge impact on local consumer prices,” it pointed out.

Prices of agricultural produce and fisheries soared 8.5% in January, on a poor harvest and the outbreak of avian influenza.

While inflation pressure from the demand side is still not large, that from overseas factors such as the rising won-dollar rate and inflation in major economies is likely to come. This means the country will likely enter an era of low growth and high inflation, ending years of low growth and low inflation.


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