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GDP deflator indicates possibility of deflation

Dec 04,2019
The GDP deflator hit a 20-year low, the latest sign of weak prices and possible deflation.

On Tuesday, the Bank of Korea said that the statistic - a ratio of nominal GDP to real GDP that tracks price changes across the board - fell 1.6 percent from the same period a year earlier, the lowest reading since the second quarter of 1999, when Korea was reeling from the Asian financial crisis.

The central bank cited fluctuations in the supply side - especially food, oil and other exports - as the main driver of lower prices, although think tanks, such as Korea Development Institute, point to weak spending power.

In the third quarter, semiconductor and petrochemical prices were significant factors, according to an official at the bank.

While the GDP deflator covers a broad range of items, including exporting products and investment instruments, the consumer price index tracks mainly retail products.

The consumer price index has been trending downward, falling by a record in September, with a minus 0.4 percent reading. It flat-lined at 0 percent in October, and edged up 0.2 percent in November.

The central bank expects 2019 inflation to come in at 0.4 percent.

It confirmed third-quarter economic growth of 0.4 percent, in line with the early estimate, though it corrected some in components.

Domestic spending increased 0.2 percent in the July-September period on quarter, revised up from a 0.1 percent gain.

Exports gained 4.6 percent during the period, up 0.5 percentage points from the previous prediction.

The changes were offset by a downward revision in construction investment. Construction investment shrank 6 percent, compared with the previous 5.2 percent.

To reach 2 percent GDP growth this year, fourth quarter growth must be at least 0.93 percent.

The bank has maintained an optimistic view on annual growth since it adjusted the growth projection to 2 percent last week, despite some international investment banks setting forecasts below the 2 percent mark.

It said that the government’s expansionary fiscal policy is likely to support the economy in the last quarter of the year, despite challenges at home and abroad.

Korea’s real gross national income expanded 0.6 percent in the third quarter from the previous quarter.

BY PARK EUN-JEE [park.eunjee@joongang.co.kr]