COVID-19-Induced Corporate Business Shock... Larger Decline Than During MERS and Financial Crisis (Comprehensive)

Bank of Korea Business Survey Index (BSI) Drops 10P
Record Largest Decline Ever

Domestic Supply Chain Shaken Following China
Manufacturing and Domestic Demand Face Additional Impact Inevitably

[Asia Economy Reporter Kim Eunbyeol] The corporate sentiment index, which had been rising since the end of last year, plummeted due to fears of the novel coronavirus infection (COVID-19). The level of corporate sentiment was the lowest in four years, and the decline was the largest ever recorded. As corporate sentiment rapidly cooled following consumer sentiment, the government's expectation of a 'V-shaped' rebound is becoming increasingly distant.

According to the 'February 2020 Business Survey Index (BSI)' released by the Bank of Korea on the 26th, the overall industry BSI for this month was 65, down 10 points from the previous month. This is the lowest figure since February 2016 (63). The BSI is an indicator that reflects the business conditions perceived by companies; a figure below 100 means that more companies view the economy pessimistically than optimistically.

The magnitude of the decline was also the largest since the Bank of Korea began compiling statistics in 2003. The drop in the overall industry BSI was greater than during the Middle East Respiratory Syndrome (MERS) outbreak in June 2015, the global economic recession caused by the European debt crisis in July 2012, and the 2008 financial crisis. The previous largest decline was 9 points.

Negative views were widespread regardless of company size or sector, including large corporations, small and medium enterprises, export companies, and domestic companies. The manufacturing industry BSI recorded 65, down 11 points from 76 in the previous month. This manufacturing BSI is also the lowest since February 2016 (63), and the decline matches the 11-point drop seen during the spread of the European debt crisis in July 2012. The manufacturing business index had fallen to 68 in August last year but showed improvement until last month; however, it sharply declined this month as the impact of COVID-19 was reflected. A Bank of Korea official explained, "Exports of electronic components related to semiconductors and displays decreased, and production at automobile manufacturers was temporarily halted due to parts supply disruptions." The non-manufacturing business index fell sharply by 9 points to 64 compared to the previous month. This is also an unusual drop in over five years, matching the previous low of 64 in February 2016.

◆Both Domestic Demand and Production Hit Hard... Manufacturing Impact Greater than MERS= Analyzing the BSI by industry reveals that COVID-19 is directly impacting both domestic demand and production. While domestic sectors experienced only short-term shocks during the MERS outbreak, this time the export and manufacturing sectors, which constitute the majority of South Korea's economy, are adversely affected, making the situation more severe. This is also why the government's expectation of a 'V-shaped rebound' is clouded.

Specifically, the business sentiment in the electronics, video, and telecommunications equipment sector (-18 points), automobile sector (-18 points), and metal processing sector (-11 points) sharply declined. The impact was widespread across company sizes as well. Large corporations (-11 points), small and medium enterprises (-11 points), export companies (-13 points), and domestic companies (-10 points) all deteriorated simultaneously. This contrasts with the MERS outbreak period when the electronics, video, and telecommunications equipment BSI dropped by 8 points and the automobile sector by only 4 points.

The Bank of Korea's February BSI survey was conducted from the 11th to the 18th. Therefore, this index does not reflect the situation after COVID-19 rapidly spread domestically, yet the shock to manufacturing is already evident. The reason can be found in the collapse of China's global value chain (GVC). Due to the COVID-19 outbreak, China extended the Lunar New Year holiday and some factories ceased operations, causing difficulties for South Korean companies in procuring intermediate goods and parts. Hyundai Kia Motors is a representative example. Kang Changgu, head of the Corporate Statistics Team at the Bank of Korea's Economic Statistics Bureau, explained, "Compared to MERS and Severe Acute Respiratory Syndrome (SARS), the impact on manufacturers is greater. Since many of our companies have production bases in China and engage in processing trade, the effect on manufacturing is more pronounced."

[Image source=Yonhap News]

◆Additional Manufacturing Impact After Domestic Spread... Domestic Demand Shock Likely to Expand= The bigger problem is that the spread of COVID-19 has not ended here. As COVID-19 landed domestically, additional damage to manufacturing is already becoming visible. Samsung Electronics temporarily closed its Gumi plant after a confirmed case occurred there. LG Electronics and LG Display also restricted access for some production workers at their Gumi plants. If production shutdowns occur again in manufacturing, which has already experienced a 'shut down' due to the China-originated parts shortage, damage across the entire industry will be inevitable.

Additional damage to the non-manufacturing sector is also unavoidable. The February non-manufacturing business performance BSI fell 9 points from the previous month, mainly due to declines in wholesale and retail trade (-13 points), transportation and warehousing (-24 points), and accommodation (-42 points). Compared to the 11-point drop in non-manufacturing BSI during MERS, the current situation is still manageable, but if COVID-19 spreads further, there is no room for complacency.

With all industries being affected comprehensively, analyses suggest that the government's initially expected 'V-shaped rebound' will be difficult to achieve. On the 17th, Hong Namki, Deputy Prime Minister and Minister of Economy and Finance, stated during an economic department briefing that "COVID-19 is a temporary shock." This meant that when an infectious disease outbreak occurs, the economy typically shows a 'V-shaped' pattern of sharp decline followed by rebound. However, at that time, there had been no confirmed cases for five consecutive days, and the situation has since changed. If South Korea's manufacturing stops, the economy could enter a long-term 'L-shaped' recession instead of a V-shaped recovery.

[Image source=Yonhap News]

Meanwhile, corporate outlooks for March are also pessimistic. The manufacturing sector's March business outlook BSI fell 8 points from the previous month to 69, and the non-manufacturing sector's March business outlook BSI dropped 6 points to 68.

The Bank of Korea's consumer sentiment index (CCSI) for February, released the day before, recorded the third-largest drop ever. The economic sentiment index (ESI), calculated by combining the BSI and the consumer sentiment index (CSI), fell 8.5 points from the previous month to 87.2. This is the lowest since March 2009, during the aftermath of the financial crisis. This indicates that not only households but also major economic agents such as companies are shaken by COVID-19.

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