Red Light for Economic Recovery in 2nd Half
It was reported that production, consumption, and investment had all decreased in July. This simultaneous decline in the three major indicators of industrial activity, which together showcase the vitality of the South Korean economy, is the first since January. Additionally, facility investment recorded its largest decrease in 11 years and 4 months.
According to the “July Industrial Activity Trends” report released by Statistics Korea on Aug. 31, the seasonally adjusted all-industry production index, excluding agriculture and forestry, stood at 109.8, marking a 0.7 percent decrease compared to the previous month. This decline in industrial production is the first in four months since April at -1.3 percent. The sharp increase in public administration due to the government’s early fiscal execution for economic stimulus in May and June had a significant impact, with a 6.5 percent decrease in July. Additionally, both manufacturing industries and mining and manufacturing industries also saw a 2.0 percent decrease each. The production of key products in the manufacturing sector experienced significant declines, such as electronic components at -11.2 percent, machinery and equipment at -7.1 percent, and semiconductors at -2.3 percent.
In July, retail sales, as measured by the retail sales index, dropped by 3.2 percent compared to the previous month. This marks the largest decline in three years since July 2020 at -4.6 percent. The 12.3 percent decrease in the sale of passenger cars, coupled with subdued consumption due to concentrated heavy rainfall, contributed to this decline, following the end of the reduction in individual consumption tax on automobiles at the end of June.
Investment indicators also showed weakness. Equipment investment in July dropped by 8.9 percent, marking the largest decline since March 2012 at -12.6 percent. There were significant declines in transportation equipment at -22.4% percent and machinery at -3.6 percent, including special industrial machinery.
The recent “triple decrease” is attributed to various external and temporary factors, according to government analysis. These factors include economic uncertainties related to China, adverse weather conditions during the summer, and a temporary reduction in car sales.
In July, exports from the manufacturing sector declined by a significant 14.5 percent compared to the previous month. This marks the largest decline in 35 years and 11 months since a 15 percent decrease in August 1987. Additionally, domestic shipments also decreased by 2.4 percent, leading to an overall 7.8 percent contraction in the manufacturing sector's output.
With decreased shipments, manufacturing sector inventory increased by 1.6 percent. The inventory-to-shipment ratio rose by 11.6 percentage points to 123.9 percent compared to the previous month. The average operating rate in the manufacturing sector also fell to 70.2 percent, a decrease of 1.6 percentage points from the previous month. Notably, the core export item for South Korea, semiconductors, showed weak performance. Semiconductor production in July dropped by 2.3 percent, showing a return to a declining trend since February at -15.5 percent. Despite semiconductor companies implementing production cuts and reducing investments, inventories grew by 4 percent as shipments decreased by 31.2 percent compared to the previous month.
Consumption declined in durable goods by 5.1 percent, which includes passenger cars, non-durable goods by 2.1 percent, such as groceries, and semi-durable goods by 3.6 percent, including clothing. Equipment investment also dropped in transportation equipment, with a decline of 22.4 percent, and machinery, which decreased by 3.6 percent, due to the adverse effects of deteriorating corporate performance.