Has the Economy Hit Bottom? Consumer and Business Sentiment Improve Simultaneously "Efficient Policy Response Is Key"

[Image source=Yonhap News]

[Image source=Yonhap News]

[Asia Economy Reporter Kim Eunbyeol] Consumer and corporate sentiment is gradually improving amid the spread of the novel coronavirus infection (COVID-19). Although the number of confirmed COVID-19 cases is still increasing, this is the result of proactive policy responses. Compared to the 2008 global financial crisis, when recovery was seen in about a year, the improvement is relatively faster; however, there is still a prevailing view that it is necessary to monitor the situation further to see how much this will translate into actual economic recovery. This is because there are inherent limits to raising sentiment indices solely through policy responses.

According to the Bank of Korea's 'July 2020 Consumer Sentiment Survey' released on the 28th, the Consumer Confidence Index (CCSI) for this month was 84.2, up 2.4 points from June. The CCSI is an indicator calculated using six of the 15 indices that make up the Consumer Sentiment Index (CSI): current living conditions, living conditions outlook, household income outlook, consumption expenditure outlook, current business conditions, and future business conditions. A value below 100 indicates pessimism in consumer sentiment compared to the long-term average (2003?2019). Although the absolute CCSI is still below 100 and thus pessimistic, consumer sentiment has improved for three consecutive months.

However, the month-on-month increase in the CCSI has slowed down, with rises of 6.8 points in May, 4.2 points in June, and 2.4 points this time. Kwon Cheoyoon, head of the Statistics Survey Team at the Bank of Korea’s Economic Statistics Bureau, said, "Proactive policy responses such as emergency disaster relief funds have somewhat boosted consumer sentiment, but as the effect diminishes, the rate of increase is shrinking." He added, "Future consumer sentiment will be influenced by additional responses or the COVID-19 situation."

As the public feels that the economy, which had been contracted due to COVID-19, is improving, the Current Business Conditions CSI rose 5 points month-on-month to 49. The Current Living Conditions CSI, compared to six months ago, also increased by 1 point to 85. The Household Income Outlook CSI and Consumption Expenditure Outlook CSI each rose 2 points month-on-month to 90 and 95, respectively. Despite the government’s high-intensity real estate measures last month and this month, the nationwide apartment sale prices increased, pushing the Housing Price Outlook CSI up again.

[Image source=Yonhap News]

Corporate business conditions also improved for three consecutive months. Last month, the manufacturing sector’s sentiment rebounded for the first time in five months and continued to recover for two months. According to the Bank of Korea’s 'July 2020 Business Survey Index (BSI) and Economic Sentiment Index (ESI)' released on the 30th, the overall industry BSI this month was 60, up 4 points from the previous month. The overall industry BSI has steadily risen after falling to 51 in April. Lee Seongho, head of the Financial Statistics Department at the Bank of Korea’s Economic Statistics Bureau, said, "Although it has not yet returned to pre-COVID-19 levels, it is indeed on a recovery trend." During the 2008 global financial crisis, it took about a year for corporate sentiment to recover. Lee added, "It is unknown how long it will take to recover to pre-COVID-19 levels, but the amplitude of corporate sentiment fluctuations this time is smaller than during the financial crisis."

The manufacturing sector, which was particularly hit hard by COVID-19, is also recovering. The manufacturing business conditions BSI rose 6 points month-on-month to 57 this month. The manufacturing BSI had steadily declined since January, dropping to 49 in May before rebounding and rising. However, although corporate business conditions are recovering, the absolute figures remain low, indicating many companies have a negative outlook. The BSI is an index surveying entrepreneurs’ judgments and forecasts on current business conditions; if more respondents answer negatively than positively, the index falls below 100. The lower the figure, the worse the perceived business conditions.

Experts say that it is clear that the economy has bottomed out and sentiment is improving for now. However, they point out that for this recovery trend to continue, available policy measures must be sustained. Kim Yongbeom, First Vice Minister of the Ministry of Economy and Finance, emphasized, "We share the recognition that now is the time to achieve a full-scale economic rebound, and we will mobilize all available policy measures to accelerate economic recovery in the second half of the year."

He added, "We will expand financial support to vulnerable sectors and enhance the role of finance so that the liquidity expanded during the crisis response flows into productive sectors such as the Korean New Deal projects."

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