South Korea Feb inflation eases amid growing economic headwinds

SINGAPORE (ICIS)–South Korea’s headline inflation eased in February, giving the central bank flexibility to loosen monetary policy to boost economic activity amid a slowdown.

• 1.9% average inflation forecast kept for 2025-2026
• Feb PMI reading in contraction mode at 49.9
• Feb exports rebound weaker than expected

Consumer price inflation in Asia’s fourth-largest economy eased last month to 2% on a year-on-year basis, slowing from the six-month high of 2.2% in January, data from Statistics Korea showed on Thursday.

After staying below the central bank’s 2% target in September-December 2024, inflation spiked in January due to rising global oil prices, compounded by weakness of the Korean won.

“Going forward, consumer inflation is expected to fluctuate around the target level amid mixed factors of a weak local currency and low demand pressure,” the Bank of Korea (BOK) said in a statement.

The won (W) has strengthened 2% against the dollar this year, reaching around W1,440 against the US dollar on Thursday, after tumbling to its weakest level in almost 16 years in early January, with the downward pressure aggravated by a prolonged domestic political instability.

Core inflation, which excludes volatile food and energy prices, also eased in February to 1.8%, from 1.9% in the previous month.

South Korea’s trade-reliant economy is facing numerous challenges, including the protectionist policies of the US’ Trump administration.

In response to these headwinds and with inflation largely in line with expectations, the BOK has adopted a more accommodative monetary policy stance, cutting its benchmark interest rate three times since October 2024.

On 25 February, the central bank cut its policy interest rates by 25 basis points to 2.75% as it revised down its GDP forecasts.

GDP growth this year is projected at 1.5%, down from its previous estimate of 1.9% and lower than the 1.6% to 1.7% range indicated in January.

For 2024, South Korea’s final real GDP growth was confirmed at 2.0%, matching the preliminary estimate released in January, the BOK said on 5 March.

Meanwhile, the central bank maintained its inflation average forecast of 1.9% for both this year and next.

“Export growth has weakened amid a slump in consumption, driven by increased political uncertainties following the declaration of martial law and by a deterioration in weather conditions,” the BOK said.

“Trends in the domestic demand recovery and in export growth are forecast to be lower than previously expected due to deteriorating economic sentiment and due to U.S. tariff policies,” it stated.

South Korea is a major importer of raw materials like crude oil and naphtha, which it uses to produce a variety of petrochemicals, which are then exported. The country is a major exporter of aromatics such as benzene toluene and styrene.

The country is experiencing a political crisis stemming from President Yoon Suk Yeol’s controversial declaration of martial law in December, which has led to his impeachment and arrest.

Its Constitutional Court is deciding President Yoon’s fate, reviewing his impeachment after weeks of public trials, with his insurrection trial expected to take months and a verdict potentially reached by late 2025 or early 2026, according to media reports.

ECONOMY LOSING STEAM
South Korea’s industrial production shrank in January, with noted declines across output, consumption and investments.

January’s overall industry output in January fell 2.7% year on year, reversing a 1.7% increase in December, official data showed on 4 March.

Industrial output in South Korea’s manufacturing and mining sector decreased by 2.3% in January compared with the same month last year.

The services and construction sector output declined by 0.8% and 4.3%, respectively.

Data released over the weekend showed that February exports rose 1.0% year on year, a sharp reversal of the 10.2% decline in January.

Imports also increased, rising by 0.2% compared to a 6.4% drop in January, though this was below market expectations of a 2.6% rise.

“While the timing of the Lunar New Year holiday adds volatility to the data, underlying momentum weakened in February,” Dutch banking and financial information services provider ING said in a note.

The Lunar New Year, which is celebrated in most parts of northeast and southeast Asia, fell on 29 January.

Conversely, car exports rebounded strongly by 17.7% year on year in February after falling in the previous three months.

“Carmakers are likely to push their products out as early as possible before the reciprocal tariffs come into effect,” ING said.

“We expect exports to remain a growth driver for the economy in the first quarter of 2025. Despite the moderation in exports, a sharper decline in imports should boost the positive contribution from net exports in Q1 2025.”

MANUFACTURING PMI BACK IN CONTRACTION 
S&P Global’s manufacturing PMI for South Korea dipped to 49.9 in February from 50.3 in January, even though output and new orders increased.

This suggests that exports are likely to maintain their upward trajectory, while the domestic economy is acting as a drag on overall growth.

“As suggested by the local business survey, business confidence remained weak amid political instability in Korea and uncertainty surrounding global trade,” ING said.

“We expect the domestic political situation to become clearer in two weeks following the Constitutional Court ruling on the impeachment of President Yoon,” it added.

“But US trade policy is likely to remain a headwind for businesses,” ING said.

Focus article by Nurluqman Suratman

Thumbnail image: At a container pier in South Korea’s southeastern port city of Busan on 1 November 2023.(YONHAP/EPA-EFE/Shutterstock)