Deflation – South Korea Prices in Historic Decline

The “canary in the coal mine” of the global economy could be showing signs of stress.

The South Korean economy is closely watched because its exports are said to be a lead indicator of global economic activity. Its export markets of steel, automobiles, ships, chemicals, clothing, television sets, household appliances, computers and semiconductors represent a neat smorgasbord of an economy. When South Korean exports are in demand, all is well in the world and the global economy is doing fine. When South Korean exports decline, though, the fall in demand means that the global economy is probably suffering. Exports from South Korea tumbled 13.6% year-on-year in August 2019 following an 11% percent fall in July and a 13.5% decline in June. Clearly, South Korean exports are displaying severe weakness.

Now, according to data released last week, the Consumer Price Index (CPI) in South Korea decreased by 0.04% in August from a year earlier. It is the first time that South Korea has experienced consumer price deflation since statistics began to be compiled in 1965. This has prompted comparisons with its neighbor, Japan, which has experienced stagnant or falling consumer prices for decades since its stock market bubble burst in 1989. As we have pointed out before, though, falling consumer prices need not be associated with a shrinking economy. In fact, as an economy grows, prices should naturally decline (in the language of economists, all else being equal.) However, all else is never equal and so we have to look at each case on its own merit.

The CPI deflation in South Korea comes as the growth rate in Gross Domestic Product has slowed from nearly 4% in 2017 to just over 2% now and so, although it has many differences with Japan’s case, the fall in consumer prices appears to be coincident with a slowing economy in South Korea. Nevertheless, although the pace is declining, the economy is still growing and so falling consumer prices, in that sense, could be viewed as a natural development. If South Korea CPI continues to decline, do not be surprised to witness increasing panic from authorities. Bear in mind, though, that they will be ringing the alarm bells with one aim in mind — to provide monetary or fiscal stimulus to the economy, and thereby increase government influence in the process.

190910 - MG Deflation