BOK to trim this year's growth forecast due to martial law fiasco

By Lee Kyung-min Bank of Korea Gov. Rhee Chang-yong attends a press conference, Wednesday. Yonhap The Korean economy is expected to grow 2.

1 percent this year, down from the previous forecast of 2.2 percent, scarred by President Yoon Suk Yeol's botched attempt to declare martial law, the country’s top monetary policymaker said Wednesday. Underpinning the pessimism is rapidly weakening consumer confidence and economic indicators despite weak growth in exports remaining within expectations.



The country’s creditworthiness should be robust, provided the opposition-controlled National Assembly reaches a bipartisan agreement on the budget followed by swift implementation, according to Bank of Korea (BOK) Gov. Rhee Chang-yong. Signs of weakness in the economy can be countered by a stimulus package, with a policy focus on targeted assistance for the most vulnerable group of income earners and businesses.

“Retail spending including card usage is taking a dive to a greater degree than we expected,” Rhee said during a press conference, Wednesday. The 2.1 percent revision reflects the expected decline in the fourth quarter growth forecast of 0.

4 percent edging down from the previous 0.5 percent. “The possibility of this year’s growth inching down to 2.

1 percent is very high. As for next year, our initial forecast of 1.9 percent will be down due to the recently passed budget leading to about 0.

06 percentage points in economic contraction.” The country’s plunging currency against the dollar is not as great a source of concern compared to the unexpected political developments, with about 30 won in gains expected once the status quo returns to the pre-martial law market conditions, according to Rhee. [INTERVIEW] Moderate BOK easing comes at expense of economic growth: Fitch [INTERVIEW] Citi emphasizes commitment to global FX management [INTERVIEW] Korea should approve spot bitcoin ETF to boost crypto growth: HashKey Global [INTERVIEW] Korea’s robust exports to reduce recession fears: S&P, Fitch [INTERVIEW] BOK's too-high-for-too-long stance could tip Korea into recession: Moody's Analytics The Korean currency at 1,430 won will push up inflation by about 0.

05 percentage points, in his view. “Our inflation forecast of 1.9 percent for next year will be revised to 1.

95 percent, a negligible change. Headline inflation is tempered at below tour target of 2 percent, warranting us to prioritize financial stability and near-term pickup in economic and consumer sentiment.” Korea’s foreign reserves, the ninth largest globally, will not dip to below 410 billion dollars, he added.

Bank of Korea Gov. Rhee Chang-yong, left, and Deputy Gov. Kim Woong attend a press conference, Wednesday.

Yonhap Meanwhile, low-income earners were more vulnerable to the effects of "cheapflation" compared to their wealthier peers, a major factor in the anemic spending brought on and amplified by the extended period of higher interest rates following the pandemic, according to a central bank report released earlier in the day. A portmanteau of cheap and inflation, cheapflation refers to a phenomenon where the prices of less expensive goods rise faster than those of more expensive varieties of the same goods, as defined by the National Bureau of Economic Research and the BOK. Included are milk, processed food, seafood, grains, eggs, cigarettes, hygiene products, kitchenware, laundry detergents, toys and electronics.

Chief among the price drivers were a sharp rise in the cost of imported raw materials, along with a shift in consumer preferences toward cheaper products. In many cases, frugal spending became pointless. The prices of cheaper goods rose more quickly due to increased demand, explained by the overall weak purchasing power of consumers amid stagnant real income.

Also at play was the low price flexibility for the goods to cushion higher import prices, with the raised costs passed entirely on to the consumers. The once-surging inflation was tempered to below the central bank’s target of 2 percent. However, the prices of cheaper varieties remain high.

Once prices go up, they do not come down as easily. Read More Diffusing panic key to containing martial law debacle fallout: BOK head BOK surprises with key rate cut amid economic slowdown, weak exports BOK faces daunting rate dynamics amid steady Fed BOK eyes policy shift as inflation shows signs of cooling According to the BOK report, perceived inflation for the bottom 20 percent income group reached 13 percent from April 2019 to March 2023. This is 1.

3 percentage points higher than the perceived inflation rate for the top 20 percent income bracket. Similarly, the price of the cheapest sausages, ranked on a scale of four, jumped 16.4 percent from January 2020 to September 2023.

This increase was far faster than the 5.6 percent rise for the highest-priced products. On a year-on-year basis, the inflation gaps between the various product categories were minimal leading up to the pandemic in 2020.

However, the inflation gaps grew larger until reaching their peak in January 2023, and have since started to narrow, thanks to a slowing rate of price increases. Read More Currency volatility to widen due to gov’t plan to offset tax shortfall with FX stabilization funds Plunging won-yen coupling fuels market volatility in Korea Plunging won exacerbates inflation woes Martial law fiasco hits equity, FX markets The BOK said the gap demonstrates growing inflation inequality, as evidenced by the differences in perceived inflation between income groups. Consumers have different consumption baskets to buy from, meaning their choices can vary depending on prices or brands.

However, all things equal, the higher costs of affordable goods have a greater strain on low-income earners. High-income groups do not feel as much of a pinch, since the price changes in their usual choice of goods are minimal. The BOK said the gap highlights growing inflation disparities, as reflected in the differences in perceived inflation between income groups.

Consumers have different spending patterns, meaning their choices can vary depending on factors like prices or brands. However, all else being equal, the higher costs of affordable goods place a greater strain on low-income earners. High-income groups are less affected, as the price changes in their typical choice of goods are minimal.

“During a period of high inflation, many households seek cheaper goods or shop at discount stores to buy the same products at lower prices,” the report said. “Lower tariffs on imported goods and targeted discounts for low-priced goods can help reduce the burden on vulnerable income groups and narrow income disparities.”.