Policy Effects Fade... Consumption Indicators Plummet Again

Statistics Korea, July Industrial Activity Trends

Retail Sales Index Decreases by 6%
Back to February Level When COVID-19 Spread
Effects of Disaster Relief Funds and Individual Consumption Tax Cut Worn Off
Facility Investment Also Declines Again by 2.2%

(Photo) [Image source=Yonhap News]

[Sejong=Asia Economy Reporter Joo Sang-don] Among the three major industrial activity indicators, 'retail sales,' which showed the fastest recovery in recent months, has plummeted at the largest scale since February this year when COVID-19 first spread. This is due to the disappearance of policy effects such as emergency disaster relief payments and a 70% cut in the individual consumption tax on automobiles. Facility investment has also returned to a declining trend. With the longest rainy season on record and the resurgence of COVID-19 leading to strengthened social distancing measures, there are concerns that economic indicators for August will fall even more sharply.

According to the 'July Industrial Activity Trends' released by Statistics Korea on the 31st, the retail sales index stood at 111.1 (2015=100), down 6.0% from the previous month. This decline was influenced by reduced sales in durable goods such as passenger cars (-15.4%), semi-durable goods such as clothing (-5.6%), and non-durable goods such as pharmaceuticals (-0.6%). The decrease matches the level recorded in February (-6.0%), when the impact of COVID-19 was fully reflected, marking the first month-to-month decline since March (-0.9%) in four months.

An Hyung-jun, Economic Trend Statistics Officer at Statistics Korea, explained, "Looking at the retail sales trend, there was a sharp contraction in February and March, followed by an increase from April due to the individual consumption tax cut on automobiles, and a significant rise from May to June thanks to disaster relief payments. However, as the tax cut rate was reduced from 70% to 30% starting in July and 90% of the relief funds were used up by June, the policy effects diminished, leading to a month-to-month decrease in retail sales." However, An added regarding the disaster relief funds, "Although 90% was used up in May and June, ending the direct impact, from a theoretical perspective, there could still be multiplier effects in the economic flow, so it is difficult to definitively say the effect has ended."

Facility investment also contracted again due to the reduced tax cut rate. It decreased by 2.2% compared to the previous month. After recording -6.5% in May and rebounding by 5.2% in June, it fell again by more than 2%. The main components affecting facility investment are machinery and transportation equipment; machinery increased by 2.3% month-to-month, but transportation equipment decreased by 14.7%. Reflecting the reduced tax cut, domestic automobile shipments, which had increased by 19.8% in June compared to the previous month, turned to a decline of -0.4% in July. Meanwhile, construction output (constant prices) was flat in building construction (0.0%) but increased by 5.0% in civil engineering, resulting in a 1.5% rise compared to the previous month.

However, total industrial production increased by 0.1% month-to-month, with growth in mining and manufacturing (1.6%), services (0.3%), and construction (1.5%). Although this marks two consecutive months of growth following 4.1% in June, the rate of increase has significantly slowed. Manufacturing production growth among mining and manufacturing also shrank from 7.4% in June to 1.8% in July. Accordingly, manufacturing shipments growth declined from 8.1% to 1.6% during the same period. Manufacturing inventories increased by 0.2% month-to-month. Service production decreased in wholesale and retail trade and education but increased in finance, insurance, and information and communication, resulting in a 0.3% month-to-month rise. Among wholesale and retail trade, wholesale increased, but retail and automobile and parts sales decreased, leading to a 1.4% decline compared to the previous month.

The coincident index of economic indicators, which reflects the current economic situation, stood at 97.2, up 0.2 points from the previous month, while the leading index, which forecasts future economic conditions, rose 0.4 points to 100.3. Officer An said, "The composite coincident and leading indices and their cyclical components increased compared to the previous month, indicating an overall upward trend. However, the economic shock caused by the resurgence of COVID-19 in mid-August was not reflected in the July industrial activity data due to timing limitations."

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