Why Korea’s economic prospects remain gloomy despite falling oil prices

Why Korea’s economic prospects remain gloomy despite falling oil prices. December. 11, 2014 08:20. .

The price of the U.S. West Texas Intermediate crude oil recently fell to 63 U.S. dollars per barrel, the lowest in 65 months and down by about 40 percent from a year earlier. The prices of the Dubai and Brent crude oil are also weak, affected by the United States’ increased production of shale gas, the global economic slowdown and the failure by oil-producing countries to reduce crude production.

It has long been a common sense that lower international oil prices have positive effects on the global economy as well as South Korea. In particular, South Korea, which fully depends on imported oil, often enjoyed a booming economy, as cheaper crude oil led to less costs for oil imports and industrial production and to lower inflation. These days, however, such economics of crude oil does not work. South Korea find it hard to increase exports due to economic slumps in both advanced countries and emerging economies. Oil exporters such as Russia, Nigeria and Venezuela are seeing the value of their currencies plummeting due to falling crude prices to the extent that there are now talks of possible currency crisis originating from emerging economies. Concerns over deflation have grown bigger.

Seoul’s Ministry of Strategy and Finance projected in a report Tuesday that falling crude prices would promote corporate investments and household consumption, having positive impacts on the country’s economic growth. Despite reduced production costs caused by cheaper crude oil, the global economic slump and the continued weakness of the Japanese yen have made it more difficult for South Korean companies to exports. The ministry also said that it is possible for internal and external conditions to offset the positive effects of falling crude prices.

The state-funded Korean Development Institute on Wednesday lowered its prospect for South Korea’s economic growth rate for next year to 3.5 percent from the previous outlook of 3.8 percent. The think tank also expressed concern that the coupling of a long-term slump in the European economy and a rapid slowdown in the Chinese economy could sent South Korea’s economic growth rate to just over 3 percent in a worst case scenario. Slow economic growth is the fundamental cause of many economic problems such as unemployment, household debts, fiscal deficits and welfare budget shortages. Even though the domestic economy is showing no sign of picking up despite falling international oil prices, the government and the political circles do not seem to feel a sense of crisis, let alone present ways to overcome the situation. This is the main reason for the gloomy economic prospects despite the welcome declines in oil prices.