Last Year's Industrial Production Index Hits Worst... How to Handle the 'Wuhan Pneumonia' Setback?

Announcement of December 2019 and Annual Industrial Activity Trends
Annual Total Industry Production Index Up 0.4%
Lowest Since Statistics Began in 2000
Manufacturing Average Operating Rate 72.9%...Lowest Since IMF Crisis

[Sejong=Asia Economy reporters Kim Hyunjung and Joo Sangdon] Last year, domestic production-related indicators showed the weakest trend since statistics began in 2000. The improvement trend that had appeared for two consecutive months from November in consumption and investment also raised concerns of a setback due to external adverse factors such as the spread of the novel coronavirus infection (Wuhan pneumonia).

According to the 'December 2019 and Annual Industrial Activity Trends' released by Statistics Korea on the 31st, the annual total industry production index increased by 0.4% compared to the previous year due to growth in the service sector. This is the lowest since Statistics Korea started compiling and publishing related statistics in 2000. Industrial production decreased by 0.7% year-on-year due to declines in electronic components and machinery equipment, marking the largest drop since 1998 (-6.4%). The average operating rate of manufacturing was 72.9%, the lowest since the 1998 IMF financial crisis (67.6%), and facility investment also fell by 7.6%, the largest decline in 10 years since 2009 (-9.6%). This was influenced by an 8.8% decrease in machinery investment and a 4.1% decrease in transportation equipment investment. Construction output (constant) decreased by 6.7% compared to the previous year as building construction performance dropped by 9.4%, also the largest decline since 2008 (-8.1%).

However, looking at the monthly data, a 'triple increase'?simultaneous improvement in production, consumption, and investment?occurred for two consecutive months in November and December last year. In December, total industry production rose by 1.4%, retail sales by 0.3%, and facility investment by 10.9%. The leading index cyclical component, which predicts the economy, rose by 0.4 points from the previous month, marking the fourth consecutive day of increase, and domestic machinery orders, a leading indicator, jumped by 40.9%. Regarding this, Hong Namki, Deputy Prime Minister and Minister of Economy and Finance, stated on his social media (SNS) that "clear signs of economic improvement are appearing" and added, "We will use these signs of economic improvement as momentum for a definite economic rebound."

The problem lies in external adverse factors that have limited policy response. Especially, as the novel coronavirus infection (Wuhan pneumonia) rapidly spreads in China, where South Korea's export dependence is high, there are forecasts that unlike the 2003 Severe Acute Respiratory Syndrome (SARS) which only negatively affected the service sector, manufacturing could also be shaken. The prolonged conflict between the U.S. and Iran is also increasing uncertainty. Deputy Prime Minister Hong Namki wrote on SNS, "There is concern that the recent novel coronavirus situation may affect the sentiment of economic agents at the beginning of the year," adding, "Although the impact on real indicators is still limited, we are mobilizing all policy capabilities to minimize ripple effects depending on future developments."

Kim Yongbeom, Vice Minister of Economy and Finance, also held an expanded macroeconomic and financial meeting on the same day and said, "We will form and operate response teams by ministry for sectors that could be negatively affected by the infection, including companies operating in China, exports, foreign investment, food and lodging industries, tourism, logistics, small and medium enterprises, and small business owners," emphasizing, "We will proactively prepare scenario-based countermeasures considering all possible situations and support measures to minimize the impact on our economy."

However, experts predict that a significant rebound this year is unlikely due to the impact of external adverse factors. Joo Won, head of economic research at Hyundai Research Institute, said, "The impact of the novel coronavirus will be reflected from the January total industry production index," and observed, "While SARS was limited to the service sector, this time negative effects on manufacturing are inevitable." Joo added, "Due to Wuhan pneumonia, logistics and factories in China are not operating, so our intermediate goods exports will inevitably suffer a major blow." Kim Soyoung, professor of economics at Seoul National University, diagnosed, "This year, due to the economic slowdown in China caused by Wuhan pneumonia, it is inevitable that Korea's exports, tourism, and consumption sectors will be negatively affected, making a significant rebound in industrial indicators difficult to expect."

On the other hand, some evaluations suggest that it is unnecessary to view the economic impact too pessimistically or sensitively. Shin Sedon, emeritus professor of economics at Sookmyung Women's University, said, "During the domestic SARS outbreak in March 2003, private consumption growth rate continuously declined from the first quarter," but added, "However, this was not due to SARS but rather the card crisis the previous year, the second North Korean nuclear crisis, and the Iraq War." He also emphasized, "Above all, China's economic growth rate, the origin of SARS, continuously rose at 9.1% in 2002, 10.0% in 2003, and 10.2% in 2004," and stated, "There is little basis to say it had a negative impact on the Korean economy."

This content was produced with the assistance of AI translation services.