High inflation + deficit constrains South Korea's economy and trade

The U.S. dollar index has fluctuated continuously in recent days. The exchange rate of the yen against the U.S. dollar has reached 136:1, falling to a new low in the past 24 years. The Korean won has also suffered from the fish in the pond. With the decline to a new low in the past 13 years, the Korean won has reached around 1300:1 against the U.S. dollar. Since the beginning of the year, the Korean won has fallen by more than 8%, making it one of the worst performing currencies in emerging markets in Asia.
The continuous depreciation of the local currency has further aggravated the imported inflationary pressure in South Korea. The economic structure of South Korea is similar to that of Japan, and energy and bulk commodities are more dependent on imports. In the first five months of this year, South Korea's energy imports accounted for 27.6% of the total imports, and it is expected that the import volume will continue to grow in the future. Due to the reduction of international market investment in energy exploitation and the impact of geographical conflicts in the past three years, international oil prices, natural gas and coal prices have soared, which is very detrimental to energy import dependent countries, including South Korea, and leads to the continued rise of inflation and the emergence of trade deficits.
South Korea's consumer price index (CPI) rose 5.4% year-on-year in May, the largest increase since August 2008. Considering that the relatively high international oil price and the sharp appreciation of the US dollar against the Korean won have led to the rapid increase in the economic cost of equipment and raw materials imported by South Korea in US dollars, the inflationary pressure in South Korea will not subside in the short term. The Bank of Korea believed that "considering the recent changes in the acceleration of the rise of international oil prices, it is expected that the future inflation trajectory will be higher than the forecast in May".
South Korean Finance Minister Chou Kyung Ho said recently that the CPI increase in June, July and August may exceed 6%, and "it is expected that the high price situation will continue for a long time".
South Korean people generally feel that the obvious increase in electricity and food prices has even reached the point of "suffocation". A questionnaire survey in South Korea shows that the dining expenses of the respondents' families increased by 9.7% to 17% in the first quarter. On June 12, the statistical data released by the Korean National Statistics portal (Kosis) showed that the Korean food and beverage price index in May rose by 4.2% over December last year, exceeding the overall price rise rate (3.4%). However, the rising trend of prices is far from over. The Korean electric power company said on June 27 that the linkage fuel adjustment fee in the third quarter's electricity tariff was increased by 5 won. Assuming that the monthly electricity consumption of the four person household is 307 kwh, the monthly electricity charge will be increased by about 1535 won. At the same time, the gas price will also rise synchronously, and the gas price per megajoule (MJ) will be increased by 1.11 won (equivalent to an increase of about 40 won per cubic meter).
Although South Korea's oil tax cut has expanded from 20% to 30% since May this year, and the gasoline price in the first week of May fell by 44.2 won compared with the previous week, since then, as the international oil price continued to rise, South Korea's gasoline price has shown an upward trend for seven consecutive weeks. Domestic gasoline prices in South Korea have reached new highs since hitting a record high on June 11 (2062.55 won in April 2012), which has further increased the living burden of enterprises and people. In order to curb the rising prices of gasoline and diesel, the Korean government decided to further expand the reduction of oil tax to 37% of the statutory maximum level from July to the end of the year, so as to alleviate inflationary pressure.
The sharp rise in international energy prices and the depreciation of the Korean won also led to a trade deficit in South Korea after 14 years. In a report released on June 21 by the Institute of international trade and trade of the Korea Trade Association, it is predicted that the trade balance of South Korea this year will turn from surplus to deficit after 14 years, and the scale of the deficit will reach a new high since 1996. The report points out that despite the strong export momentum of South Korea this year, the export scale is expected to increase by 9.2% year-on-year to $703.9 billion, breaking $700billion for the first time in history. However, imports are expected to increase by 16.8% to US $718.5 billion in the same period. The resulting trade deficit of about US $14.7 billion is not only higher than US $13.26741 billion during the international financial crisis in 2008, but also the highest level since 1996 (US $20.6 billion). The main reason is the sluggish export of some industries and the rise in international energy prices.
In addition, in view of the widening gap between the rich and the poor in South Korea and in order to prevent the cyclical rise in prices and wages, Qiu qingho warned against wage increases that may lead to inflation, and called on the top management of large enterprises in South Korea not to raise wages competitively. He said that some technology companies and large enterprise groups have been rapidly raising wages, raising concerns that other enterprises and industries may follow suit. Such salary increases not only exacerbate the inflationary pressure on the competitiveness of enterprises, but also expand the wage gap between small and large enterprises, resulting in inequality and the widening gap between the rich and the poor.
Many people worry that under the double-sided attack of high inflation and weak export recovery, South Korea's economy is facing the possibility of slowing down.