South Korea Warned Over Stagflation

The steady rise in global crude prices will invariably fuel inflationary pressure on the South Korean economy, which in the worst case scenario could trigger stagflation, a local think tank warned Sunday.

The report outlining the relationship between oil prices and inflation by the Hyundai Research Institute showed that if crude prices go up 5% every month in the second half of 2018, this could push up local consumer prices by 0.4 percentage point overall, Yonhap reported.

It said the gain also translates into a 6% rise in import prices and a 1.8% increase in producer prices.

In the first five months of this year, the benchmark Dubai crude rose an average of 2% per month, causing consumer prices for Asia’s fourth largest economy to advance 1.4% on a monthly basis.

The private research institute warned that if a rise in crude prices fuels inflation at a time of sluggish growth, the country could experience stagflation.

Stagflation is slow or stagnant economic growth amid a rise in prices, potentially leading to a contraction in gross domestic product.

The Organization of the Petroleum Exporting Countries last month agreed to increase production after cutting back on output for over a year, but crude prices have continued to rise, with many economists saying this trend may be sustained in the second half due to worldwide growth. Firm growth usually fuels demand for oil, causing prices to rise.

In addition, the crude reserve held by countries has fallen below the average for the past five years, while the strengthening of the US dollar could cause nations to buy more oil cheaply with their foreign exchange reserves.

Lower reserves usually leads to a rise in demand as countries stockpile the critical energy resource.

Meanwhile, South Korea may not be able to meet its 3% growth target this year amid a host of challenges ranging from poor employment figures to weak investment and consumption, local observers said Sunday.

Household debt rose 8% on-year to 1,468 trillion won ($1.34 trillion) in the first quarter, with the widening gap in key rates between South Korea and the United States causing worries about capital leaving the country.

Assessments by foreign and domestic investment banks and think tanks showed South Korea’s average growth hovering around 2.9% this year with some, like ING Group, estimating expansion to fall off to just 2.6%.