While exports and macroeconomic indicators have improved, small business owners continue to feel the strain of a challenging economy. Even with a recovery in consumer sentiment, high inflation, labor costs, and rent are preventing actual sales increases from translating into improved profitability. Experts predict that food prices will remain high in the second half of the year due to the impact of heat waves and extreme weather on agricultural production.
According to the Small Business Market Promotion Agency, the Business Sentiment Index (BSI) for small businesses in June fell by 4.3 points to 63.6. A BSI above 100 indicates that many small business owners feel the economy is improving, while a score below 100 reflects a negative perception of economic conditions. Although macroeconomic recovery is underway, analysts suggest it will take considerable time for this trend to reach local markets and small businesses.
Factors that could drive prices higher in the second half of the year include high exchange rates and extreme weather. If the won-dollar exchange rate remains elevated, the prices of imported food and raw materials are likely to rise. Sectors with a high proportion of raw materials, such as the restaurant and food industries, could see immediate cost increases due to rising exchange rates. Imported livestock products, including beef and pork, as well as coffee beans and various processed food ingredients, are particularly sensitive to exchange rate fluctuations.
In 2022, the won-dollar exchange rate surged to around 1,400 won, contributing to rising prices for imported livestock and increasing cost pressures on the restaurant industry.
Extreme weather also poses a risk. Both domestically and globally, heat waves, droughts, and heavy rainfall are affecting the production and supply of key agricultural products. Certain crops, such as coffee and cocoa, are particularly vulnerable to weather conditions, which can significantly impact yields. Staple crops like wheat and rice may also see price pressures if production declines.
Higher temperatures can reduce livestock feed intake and growth rates, weaken immunity, and increase the likelihood of disease and mortality. A decline in productivity or a reduction in the number of animals raised can lead to decreased market supply, potentially driving up prices at the source.
During the record heat wave in 2018, for instance, the price of broiler chickens at the source rose by 27% compared to the previous month due to increased mortality and growth delays, while pig mortality increased by 57.8% year-on-year. The price of eggs also rose by 115 won compared to the previous month due to a drop in laying rates. This indicates that heat waves can have far-reaching effects, impacting not only farm productivity but also grocery prices and cost burdens for restaurants.
High interest rates are also a burden for small business owners. The Bank of Korea maintained its interest rate freeze in the first half of the year but raised the benchmark rate by 0.25 percentage points on July 16. There are concerns that further rate hikes may occur in the second half of the year, increasing financial costs for small business owners.
Small businesses, which often rely heavily on loans, face significant changes in monthly financial costs based on interest rates. With already high fixed and variable costs for raw materials, labor, and rent, any increase in financial costs will reduce actual profits, even if sales remain stable. This is particularly critical for small businesses with volatile sales, as rising interest burdens could determine their ability to continue operations.
Lee Eun-hee, an emeritus professor of consumer studies at Inha University, stated, "The price increases due to the heat wave are likely to extend beyond August, potentially affecting prices for two to three months or more. For small business owners who have relied on inexpensive imports, high exchange rates and poor local yields will be particularly damaging."
* This article has been translated by AI.
Copyright ⓒ Aju Press All rights reserved.