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  • Writer's pictureheejin son

Economic Trends, July 2023

Updated: Sep 5, 2023

Summary and Assessment

■ The Korean economy remains in weakened state, driven by underperformance in the manufacturing industry, although there are increasing signs of having passed the economic downturn’s nadir.

● The manufacturing industry continues to lag, characterized by a steady drop in production, a low average capacity utilization rate, and an increase in inventories.

- Despite a slower decline in production, the semiconductor industry continued to stagnate as a result of a significant rise in inventories.

- With the partial slowing of both value and volume declines in semiconductors, the reduction in exports to China is gradually narrowing, suggesting a lessening in the export slump.

● The service industry maintained positive momentum, primarily supported by face-to-face businesses, and indices related to consumer sentiment show signs of recovery

- The number of employed persons continued to rise, especially in services, and the CCSI has shown a modest upward trend since March.

- Conversely, construction sustained strong growth due to the increase in projects reaching their final stages. However, this growth is unlikely to continue given the ongoing slump in the housing market.

● Meanwhile, consumer price inflation continued its slowdown as supply-side inflationary pressures lessened.

- While rates for electricity and gas were increased, the CPI has begun to stabilize due to falling import prices and the base effect.

- Core inflation (excluding food and energy), which represents the underlying trend in inflation, remained elevated, hovering around 4%.

*All growth figures are on a year-on-year basis unless otherwise noted. This document is an English translation of the original Korean version; the Korean version takes precedence in case of any ambiguities or discrepancies.​

■ Economic Activity

:The slowdown in economic activity remained unabated, primarily driven by the manufacturing sector. A series of transient influences such as base effects and fewer workdays, curtailed production growth, but there is no sign of deceleration in economic activities.

● In April, all-industry production fell 0.8%, marking a decrease from the preceding month (2.0%), mainly due to fewer workdays (+1 day → –1 day).

- Despite a sustained surge in automobiles (27.2% → 16.6%), industrial production (-7.6% → -8.9%) remained stagnant, led by semiconductors (-26.9% → -20.2%), electronic parts (-30.3% → -30.0%), and chemical products (-19.7% → -20.5%).

- Services production (6.2% → 3.1%), although maintaining a positive trajectory, exhibited a slight moderation in growth, especially in accommodation and food services (17.8% → 2.0%) and wholesale and retail trade (0.5% → -2.7%), mainly due to base effects.

- Construction (12.0% → 12.2%) sustained its robust growth, led by the building construction sector (14.6% → 16.5%) due to an increase in projects entering their final stages. However, leading indicators like the number of housing starts (-60.4%) stagnated amidst the persistent downturn in the housing market.

● The manufacturing average capacity utilization rate (72.0% → 71.2%) remained stagnant at subpar level, while the inventory-to-shipment ratio (117.2% → 130.4%) soared from the previous month, indicating sluggishness.

- Manufacturing shipments (-7.0%) fell while inventories (15.7%) skyrocketed, driven by semiconductors (83.3%), reflecting the weakness in manufacturing.

● Exports saw a sharp contraction due to a slowdown in global demand, but semiconductors and exports to China exhibited a slower decline, implying no further deceleration in economic activity.

- The decline in exports, attributed to semiconductors and exports to China, is somewhat moderating.

* Semiconductor exports (%): (Mar.) -34.5 → (Apr.) -41.0 → (May) -36.2 * Semiconductor export volume index (%): (Feb.) -14.5 → (Mar.) -0.7 → (Apr.) -0.3

* Exports to China (%): (Mar.) -33.1 → (Apr.) -26.5 → (May) -20.8

* Average daily exports (%): (Mar.) -17.4 → (Apr.) -10.5 → (May) -9.3

- Both manufacturing and non-manufacturing BSI on future tendency showed a gradual increase.

* Manufacturing BSI on future tendency (SA): (Mar.) 65 → (Apr.) 67 → (May) 68 → (Jun.) 70

* Non-manufacturing BSI on future tendency (SA): (Mar.) 74 → (Apr.) 75 → (May) 73 → (Jun.) 75

■ Consumption

: Consumption growth has slightly moderated, but signs of an abating consumption slump persist, exemplified by a consistent increase in the CCSI.

● April’s retail sales grew by -1.1%, lower than the previous month (0.1%), and experienced a 2.3% decline on a SA MoM basis, indicating sluggishness.

● Services production (6.2% → 3.1%) exhibited a decrease in growth, primarily due to face-to-face service businesses, mainly influenced by the base effect.

● May’s Consumer Sentiment Index (CCSI) stood at 98.0, sustaining the mild upward trajectory since March and nearing the baseline (100).

■ Equipment Investment

: Equipment investment saw an uptick mainly driven by semiconductor-related investments and transport equipment, despite continued sluggishness in the manufacturing industry, thus curbing investment demand.

● Equipment investment grew by 4.4% in April, expanding from the previous month’s 1.8%, stimulated by semiconductors and transport equipment.

● The manufacturing average capacity utilization rate remained low, and leading indicators for equipment investment continued to languish.

■ Construction Investment

: Construction investment, driven by the building construction sector, remained robust, yet leading indicators seemed weak, implying that growth in construction investment might dwindle in the future.

● In April, the value of completed construction (constant) surged by 12.2%, on par with the previous month’s 12.0%.

● However, the construction orders received dipped significantly. Housing permits and starts persisted in their sluggishness, suggesting that construction investment may decelerate in the future, driven by the housing sector.

■ Prices

: Consumer price inflation continued to slow, reflecting the base effect and easing supply-side inflationary pressures.

● May’s headline inflation was at 3.3%, trailing the previous month’s 3.7%.

● Commodity prices (3.4% → 3.0%) exhibited a deceleration, led by livestock and petroleum products.

● Service prices increased by 3.7%, down from the previous month’s 4.0%, primarily due to a smaller rise in personal services (6.1% → 5.6%). ● Import price decreases caused a gradual easing of supply-side inflationary pressures.


*This article is extracted from Invest KOREA information center, 2023


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