🚨 Economy Under Pressure from High Prices & High Exchange Rates
Today Korean Economic News for Beginners | 2025.12.23
0️⃣ Increased Burden on Businesses and Self-Employed, Concerns Over Delayed 2026 Recovery
📌 Rising Raw Material Costs Meet Weak Consumption…Profitability Decline Leads to Investment and Employment Contraction
💬 As high prices and high exchange rates persist, the management burden on businesses and small business owners is intensifying. Raw material prices are rising, but weakened consumption makes it difficult to raise selling prices, causing profitability to decline. A retail industry survey shows that the 2026 growth rate is expected to be the lowest in the past five years, with both small and large companies viewing next year's business conditions negatively. High exchange rates are pushing up import costs for raw materials, while weak consumer sentiment restricts price increases, shrinking corporate investment and employment. Experts warn that "the combination of weak domestic demand and exchange rate volatility will slow economic recovery."
1️⃣ Easy Explanation
These days, self-employed people and business owners all say they're having a hard time. Prices keep rising, customers are decreasing, and high exchange rates have increased cost burdens. Let me explain why this is happening and how it affects our economy.
First, let's understand what "high prices" and "high exchange rates" mean. High prices simply mean that things cost more. When you shop at the supermarket and think "Why did this get so expensive?" that's price inflation. The costs of food, gas, and electricity have gone up, so you can buy less with the same amount of money.
A high exchange rate means the Korean won has weakened, so you need more won to buy dollars. For example, if last year 1 dollar cost 1,300 won, but now it costs 1,450 won, the exchange rate has gone up. When exchange rates rise, it costs more to buy things from foreign countries.
Why is this happening? There are several reasons, but two main ones.
First, raw material prices have risen worldwide. Prices for basic materials like oil, iron, and copper have increased. International situations like the Russia-Ukraine war and Middle East instability have had an impact. Most of these raw materials must be imported, so rising prices increase the burden on companies.
Second, exchange rates remain high. The U.S. economy is relatively strong with high interest rates, creating strong demand for dollars. Also, domestic individual investors are buying a lot of U.S. stocks, increasing demand for dollars. These factors combined keep the won-dollar exchange rate in the high 1,400s.
Now let's look at specific difficulties in the field.
Mr. A runs a small restaurant in Seoul. Compared to last year, meat prices rose 20%, and vegetable prices increased 15%. Electricity bills and rent also went up. But the problem is that customers have decreased. As prices rise, people eat out less. Mr. A needs to raise menu prices, but he's worried that would drive away even more customers. In the end, costs are up, sales are flat, and he can't raise prices, so his profit has dropped significantly.
Company B is a small manufacturing firm. They make plastic products and import petroleum chemical raw materials. With higher exchange rates, it costs 20% more to import the same amount. Raw material prices themselves have also risen. They want to reflect these costs in product prices, but with many competitors and weak consumption, raising prices would reduce orders. Eventually, as profitability worsens, they've postponed new investments and frozen employee hiring.
Mr. C runs a clothing store. He imports clothes, and with higher exchange rates, the cost of bringing in the same products has increased 30%. But consumers are reducing clothing purchases, making it hard to raise selling prices. As inventory piles up and profits decline, running the store has become difficult.
This situation is similar across the country for self-employed people and small businesses. In fact, recent surveys show that the retail industry's 2026 growth forecast is the lowest in five years. Both small and large companies view next year's business conditions negatively.
Why is it hard to raise prices? The biggest reason is weak consumption. People's real income (actual purchasing power considering inflation) is declining. Wages increased slightly, but not enough to keep up with inflation, so real wages actually decreased. So people reduce spending. They first cut "optional consumption" like eating out, travel, and entertainment.
From a business perspective, raising prices could reduce demand even more, so they're cautious. Especially in highly competitive industries, if one place raises prices, customers go to competitors. This situation is called "difficulty in price pass-through." It means you can't pass cost increases to consumers (through price hikes).
What happens if this continues? A vicious cycle begins.
First, when corporate profitability worsens, they reduce investment. They postpone plans to buy new equipment or expand factories. When investment decreases, economic growth slows.
Second, employment contracts. Companies freeze or reduce new hiring. In severe cases, they restructure. When jobs decrease, household income falls, and consumption shrinks further in a vicious cycle.
Third, self-employed people close their businesses. When losses continue, they eventually have to close. In fact, the closure rate for self-employed people has been rising recently. Especially the restaurant and retail industries are hit hard.
How is the government responding? The government knows about this problem and is pursuing various policies.
First, supporting small business owners. They're helping self-employed people with low-interest loans, rent support, and tax cuts. But critics say these aren't fundamental solutions.
Second, considering interest rate cuts. If the Bank of Korea lowers the base rate, loan interest decreases, reducing the burden on businesses and households. But lowering rates too much could raise exchange rates further, so they're cautious.
Third, domestic demand stimulus policies. They're considering methods like gift certificates and tax benefits to increase consumption.
How should individuals prepare? Financial management is more important in these difficult times.
First, review spending and reduce unnecessary consumption. Avoid impulse purchases and develop planned spending habits.
Second, build an emergency fund. It's good to have at least 3-6 months of living expenses in cash for when income suddenly drops or large expenses arise.
Third, manage debt thoroughly. Especially if you have variable rate loans, consider converting to fixed rates or making a repayment plan.
Fourth, prepare for exchange rate changes. If planning overseas travel or international purchases, watch exchange rate trends and carefully choose when to exchange money.
Ultimately, the current high prices and high exchange rates affect not just businesses and small business owners but all citizens. As the structure of rising costs without increasing revenues continues, economic recovery is slowing. We need to watch government policies and global economic trends carefully, while individuals should also more carefully review spending and financial plans.
2️⃣ Economic Terms
📕 High Exchange Rate
A high exchange rate means the Korean won has weakened, requiring more won to buy foreign currency (mainly dollars).
- An exchange rate of 1,450 won means you need 1,450 won to buy 1 dollar.
- When exchange rates rise, import prices increase and overseas travel costs go up.
- While it can benefit export companies, actual benefits are limited due to increased import costs for raw materials.
📕 Weakened Consumer Sentiment
Weakened consumer sentiment is when consumers reduce spending and increase savings.
- It appears when economic uncertainty grows or prices rise.
- When consumption decreases, corporate sales fall, leading to reduced investment and employment.
- It's one of the main causes of domestic economic contraction.
📕 Cost Pass-Through
Cost pass-through means reflecting increases in raw materials or labor costs in product or service prices.
- Pass-through becomes difficult when competition is intense or demand is weak.
- If you can't pass through costs, corporate profitability worsens.
- In the current situation with weak consumption, cost pass-through is very limited.
📕 Weak Domestic Demand
Weak domestic demand means domestic consumption and investment are not active.
- Causes include decreased household income, rising prices, and employment insecurity.
- When domestic demand is weak, economic growth rates fall and jobs decrease.
- Even countries like Korea with high export dependency need a strong domestic market.
3️⃣ Principles and Economic Outlook
✅ The Link Between Exchange Rates and Prices
Rising exchange rates push up import prices, burdening both businesses and households.
First, import costs for raw materials increase. Korea imports almost all major raw materials like oil, natural gas, iron ore, and copper. If exchange rates rise 10%, you need 10% more won to import the same amount. Manufacturers try to reflect this cost in product prices, but it's not easy when consumption is weak. In 2022, when exchange rates exceeded 1,400 won, companies' cost burdens increased significantly.
Second, import prices for consumer goods also rise. Imported fruits, meat, and household goods we buy at supermarkets also become more expensive. Clothing and electronics also depend heavily on imports and are affected by exchange rates. Consumers feel their real purchasing power declining.
Third, inflationary pressure increases. When import prices rise, it leads to overall price increases. The Bank of Korea must raise or maintain high interest rates to control inflation, which can further contract the economy. Interest rates, exchange rates, and prices become complexly intertwined, making policy management difficult.
In past high exchange rate periods, price increases and increased corporate burdens appeared simultaneously.
✅ The Vicious Cycle of Weak Domestic Demand
Weak consumption leads to poor corporate performance, which in turn reduces employment and income, further weakening consumption.
First, household income is stagnant. Nominal wages increased slightly, but couldn't keep up with inflation, so real wages actually decreased. The fact that 2024's real wage growth rate recorded negative numbers shows this. When income falls, people must reduce consumption. Especially optional consumption like eating out, travel, and cultural activities gets cut first.
Second, corporate sales decrease. When consumption falls, sales at retail, restaurant, and service companies drop. When profitability worsens, companies try to cut costs. They postpone new investments, reduce marketing budgets, and freeze hiring. In severe cases, they implement restructuring.
Third, employment contracts. When companies reduce staff or stop hiring, unemployment rises and youth jobs decrease. People who lose jobs or can't find employment have no income and reduce consumption further. If this vicious cycle repeats, economic recession becomes prolonged.
To overcome weak domestic demand, income growth and consumption recovery must happen simultaneously.
✅ Corporate Sentiment and Investment Contraction
When companies are pessimistic about the economy, they postpone investment, which holds back economic growth.
First, capital investment decreases. Recent surveys showed both small and large companies viewed 2026 business conditions negatively. When expecting the economy to worsen, companies postpone investments in building new factories or buying machinery. When investment decreases, related industries (construction, machinery, materials) are also hit, and job creation decreases.
Second, R&D investment also decreases. When companies need immediate survival, they reduce research and development investment for the future. This cuts costs in the short term, but technological competitiveness falls in the long term. Especially small businesses lack financial resources to make innovation investments.
Third, startups contract. When the economy is bad, people hesitate to start businesses. The risk of failure is high and financing is difficult. When startups decrease, new jobs and innovation decline, reducing the economy's dynamism.
To restore corporate sentiment, policy trust and market stability are needed.
4️⃣ In Conclusion
As high prices and high exchange rates persist simultaneously, the Korean economy has entered a difficult phase. Businesses and self-employed people face dual pressure from rising costs and falling demand, leading to contracted investment and employment.
The core of the current situation is "difficulty in price pass-through." Raw material prices and labor costs are rising, but weakened consumption prevents raising selling prices, so profitability continues to worsen. Restaurants, retail, and small manufacturing are particularly hard hit, and even large companies view business conditions negatively.
The formation of a vicious cycle is concerning. A flow is emerging: consumption decrease → poor corporate performance → reduced investment/employment → decreased income → further consumption decrease. If this continues, 2026's economic recovery will inevitably be delayed.
The government is responding from multiple angles including small business support, interest rate policy, and domestic demand stimulus, but it takes time for effects to appear. Especially exchange rate management is difficult with domestic policy alone, requiring attention to global economic trends.
Individuals also need to prepare. Thorough spending management, building emergency funds, and efforts to reduce debt are important. Especially self-employed people should consider industry changes or business restructuring.
There are three key variables ahead. First, can exchange rates stabilize? Second, can consumer sentiment recover? Third, can corporate investment resume? The economy can fully recover only when these three improve.
Difficulties will likely continue in the short term, but this can also be an opportunity for structural improvement in the mid to long term. Eliminating inefficient businesses, focusing on competitive areas, and pursuing digital transformation and productivity improvement is the way to turn crisis into opportunity.
Ultimately, overcoming the era of high prices and high exchange rates requires efforts from government, businesses, and individuals. The government must pursue effective policies, businesses must enhance competitiveness through innovation and efficiency, and individuals must overcome difficulties through wise financial management. If we wisely overcome the current crisis, we can build a stronger economic foundation.
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