Frozen Manufacturing Economy Amid '3 Highs'... Dark Clouds Spread to Non-Manufacturing Sector

FKI BSI Next Month Forecast 92.6
Lowest in 1 Year 6 Months

Investment, Export, and Funding Conditions Below Baseline
Raw Material Price Rise Hits Auto Parts and Petrochemical Sectors Hardest

[Asia Economy Reporters Oh Hyung-gil, Moon Chae-seok, Yoo Hyun-seok] Company A, an auto parts manufacturer located in Gyeonggi Province, recently cut its factory operating hours in half. Due to the sharp rise in raw material prices that began earlier this year, material supply has become unstable, making it inevitable to reduce production volume. Although they must deliver pre-produced parts, the increase in raw material costs is not reflected in the delivery prices, which is causing profitability to deteriorate further.

The CEO of Company A lamented, "With fuel prices rising, additional logistics costs are piling up, so the more we sell, the more losses we incur," adding, "Revenue is decreasing while interest rates are soaring, making it difficult to repay loan interest."

Domestic companies have fallen into a 'total crisis.' Not only is the overall business climate sluggish due to raw material supply disruptions, but the simultaneous rise in exchange rates, prices, and interest rates?the so-called 'three highs (高)' phenomenon?has created a situation with no apparent escape. There are even signs that the manufacturing sector's downturn is spreading to non-manufacturing sectors, raising concerns about a broad economic slowdown across industries.

On the 29th, the Federation of Korean Industries (FKI) released the Business Survey Index (BSI) for the top 600 companies by sales, showing a July outlook of 92.6. This is the lowest level in one and a half years since January last year’s 91.7. After recording 99.1 in April, the index has remained below 100 for four consecutive months. The June BSI also fell to 86.1, the lowest in one year and nine months since September 2020’s 84.0. A BSI above 100 indicates a positive business outlook compared to the previous month, while below 100 indicates a negative outlook.

The manufacturing sector’s poor performance due to raw material supply disruptions is spreading to the non-manufacturing sector. The July BSI outlook shows both manufacturing (90.4) and non-manufacturing (95.1) sectors are sluggish. Within manufacturing, non-metallic materials and products scored the lowest at 57.1, affected by supply chain damage and the prolonged Russia-Ukraine conflict causing raw material supply issues. In non-manufacturing, the electricity, gas, and water sector was the weakest at 78.6, impacted by seasonal factors such as decreased demand for city gas.

Deputy Prime Minister and Minister of Economy and Finance Choo Kyung-ho is listening to difficulties during his visit to a noodle manufacturing company in Sejong Village Food Culture Street, Jongno-gu, Seoul on the 16th. Photo by Hyunmin Kim kimhyun81@

Looking at the outlook by sector, all major indicators except employment (103.9) fell below 100. Investment (99.7), exports (99.0), financial conditions (97.1), profitability (95.8), domestic demand (95.8), and inventory (103.6) all remained below the baseline.

Financial conditions (97.1) and profitability (95.8) have been negative for four consecutive months since April, when they recorded 96.8 and 97.4 respectively. The rise in corporate bond yields due to base rate hikes, a sharp stock market decline, worsening corporate financing conditions, and the combined effects of soaring exchange rates leading to increased manufacturing costs and sluggish product sales have contributed to this situation.

In particular, the business sentiment felt by manufacturers is rapidly freezing. According to a survey by the Korea Chamber of Commerce and Industry (KCCI) of 2,389 manufacturing companies nationwide, the business outlook index for the third quarter was 79, down 17 points from 96 in the second quarter.

The KCCI stated, "With ongoing global supply chain bottlenecks and a high exchange rate nearing 1,300 KRW/USD, coupled with the prolonged Russia-Ukraine war, the stability of international oil and raw material prices remains uncertain," adding, "If high inflation persists, domestic consumption may also contract."

Most industries failed to exceed the baseline of 100, indicating a predominantly negative outlook. Sectors directly hit by the rise in global raw material prices due to their high raw material import ratios?such as auto parts (69), petrochemicals (63), and non-metallic minerals (61)?experienced the worst business sentiment.

The poor performance in the first half of the year is also becoming a reality. While 54.9% of companies expect their first-half operating profits to fall short of plans made at the beginning of the year, only 3.8% anticipate exceeding their targets.

Choo Kwang-ho, head of the Economic Department at FKI, suggested, "Due to the limitations of government policies caused by stagflation and high inflation, the role of companies is more important than ever. It is necessary to fundamentally improve international raw material supply by deregulating, reducing tax burdens to revitalize corporate management, and promoting overseas resource development."

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