Total Directional Recession
South Korea's industry activity indexes in September showed a decrease in all three pillars of the real economy – production, consumption and investment.
First, the Manufacturing Average Capacity Utilization Rate fell to a record low since the global financial crisis. The rate stood at 71.4 percent, up 1.2 percentage points from the previous month but down 3.5 percentage points from a year earlier. The figure is lower than 79.9 percent in September of 2009 and reached a record low in 18 years after posting 68.6 percent in 1998. This is largely due to two faltering conglomerates caused by Hyundai Motor’s strike and Samsung Electronics’ Galaxy Note 7 crisis.
Particularly worrisome is that the construction industry that has sustained the national economy is shaking. Construction orders in September which hints the construction business cycle in the future decreased as much as 38.6 percent from a year ago. As the extra budget, which was approved at the National Assembly in early September, has been executed in earnest, construction orders in the public sector, such as the central government and local governments, surged a whopping 91.2 percent, but the figure in the private sector dropped 48.7 percent.
The economic growth in the third quarter went up by 0.7 percent from the previous quarter but construction investment accounted for 0.6 percentage points. It means that the country actually saw zero growth if there were no construction investments. Market watchers say that it is a serious sign that the overall economy can be hardly hit at the moment when the construction business is slowing down now.
Lee Geun-tae, a senior research fellow at LG Economic Research Institute, said, “The industry statistics trends in September show that the economy will slow down after October. Construction and consumption which have been relatively stable have started slowing.” It means that construction and consumption which sustained the economy with various policies to boost the domestic market, including a record number of house sales and reduction of individual consumption tax on cars, have been on the decrease after September.
Hyundai Motor’s strike and Samsung Electronics’ Galaxy Note 7 discontinuation are expected to continuously adversely affect consumption. The government also stopped offering the reduction of individual consumption taxes that were valid from September last year to the first half of this year. The anti-graft law, also known as Kim Young-ran Act, will also have a negative effect on consumption. Ju Won, executive director and economist at Hyundai Research Institute, said, “Consumption in the fourth quarter will plunge to the extent that we can say that “consumption cliff.”