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By Yoon Ja-young
Korea faces a growing risk of falling into the deflationary trap that hit Japan in the 1990s, the Korea Economic Research Institute said in a report Monday.
In deflationary periods, consumers delay consumption as they expect prices to fall further. This then decreases corporate sales, causes job losses and lessens consumption further in a vicious cycle. Japan's last two decades are regarded as a typical example of how deflation can ruin an economy.
The institute said the Korean economy is projected to grow 3.7 percent next year, with the government having more room to implement monetary and fiscal policies.
The United States' tapering and slowdown of growth in China are negative external factors, with household debt and uncertainties in the real estate market.
The institute expects the economy to grow 3.5 percent this year. "On top of the external and internal uncertainties, the strengthening of the Korean won against the dollar is delaying the recovery of exports. Growth is estimated to be a mere 3.2 percent in the second half of this year while it picked up 3.7 percent in the first half," said Byun Yang-gyu, director of macroeconomic policy research at the institute.
However, the report warns against the growing risk of deflation. It said while the possibility of deflation is still small, it can't be totally ignored.
"The deflation vulnerability index marked 0.31 in the fourth quarter last year and the first quarter this year, but it rose to 0.38 in the second quarter," the report notes. That figure is similar to what Japan experienced right before its deflation. "In the case of Japan, the index marked 0.31 for three consecutive months in 1992 before it entered deflation," it added.
Some economists have highlighted the deflation scenario as the country's consumer prices increased by less than 2 percent for 22 consecutive months.
Meanwhile, the institute expected consumer prices to rise slightly over 2 percent next year, on continuous rise of public services fares and the economic recovery. Inflation will be limited due to the strengthening Korean won and the stabilization of global oil prices, according to the report.
It added that the current account surplus will slightly decrease to $80.2 billion next year from this year's estimated $82.8 billion, upon an increase in imports and a deficit in the service account.
The decrease in the current account surplus, coupled with the key rate hike by the U.S. Fed, will also stabilize the won/dollar rate, with the institute suggesting 1,045 won per dollar as the average rate for the next year.
