Corporate Inventory Growth Rate Hits Highest in 26 Years... "Full-Scale Economic Recession"

Sangui 'Recent Economic Situation Assessment Based on Corporate Activities'
"Deterioration of Corporate Profitability... Need to Break the Link Between Production Decline, Employment, and Investment Contraction"

Korea Chamber of Commerce and Industry 2019~2022 Manufacturing Production-Shipments-Inventory Index Growth Rates

[Asia Economy Reporter Oh Hyung-gil] Company A, a telecommunications equipment parts manufacturer in Gyeonggi Province, reduced its factory operating rate to half of the usual level after the summer vacation period and plans to lower it further soon. Since the second half of last year, inventory has started to increase, and in the first half of this year, it has been piling up uncontrollably. There is no storage space inside the factory, so they are renting nearby warehouses, but they are now in a situation where there is no more place to store the inventory.

The CEO of Company A said, “In the first half of the year, funds were somewhat insufficient, causing delays in securing raw materials, but I feel it was rather fortunate," adding, "if export contracts with overseas companies are signed, it will at least provide some relief, but if not, the situation is so serious that employees may have to take unpaid leave starting from the fourth quarter."

As demand decreases, corporate inventories are increasing significantly, raising concerns about a full-scale economic recession.

On the 16th, the Korea Chamber of Commerce and Industry (KCCI) stated in its report titled 'Recent Economic Situation Evaluation Based on Corporate Activities' that the recent increase in corporate inventories strongly suggests the possibility of a full-scale economic downturn rather than a temporary adjustment due to external factors.

KCCI pointed out that the manufacturing inventory index growth rate in the second quarter industrial activity trend recorded 18.0%, marking the largest quarterly increase in 26 years since the second quarter of 1996, just before the foreign exchange crisis.

KCCI explained, "Inventories naturally increase and decrease according to economic fluctuations, but the recent trend of inventory growth is unusual, rising for four consecutive quarters since the second quarter of last year, which was the lowest point," adding, "It is the first time in four years since 2017 that the inventory index has shown a long-term upward trend on a quarterly basis."

By company size, the inventory index growth rate for large corporations surged from -6.4% in the second quarter of last year to 22.0% in the second quarter of this year, while small and medium-sized enterprises (SMEs) showed a relatively moderate increase from 1.2% to 7.0%.

In particular, according to an analysis based on about 1,400 manufacturing listed companies that disclose financial statements quarterly, commissioned by Korea Credit Data, large corporations' inventory assets increased from KRW 61.477 trillion in the second quarter of last year to KRW 89.103 trillion in the second quarter of this year, overwhelming the increase in inventory assets of SMEs.

Also, for the entire manufacturing sector, inventory assets increased by 39.7% in the second quarter of this year compared to the second quarter of last year. By industry, the inventory asset growth rates were especially high in non-metallic mineral products (79.7%), coke, coal, and refined petroleum products (64.2%), electronic components, computers, audiovisual, sound, and telecommunications equipment manufacturing (58.1%), and primary metals (56.7%).

Notably, in the electronic components, computers, audiovisual, sound, and telecommunications equipment manufacturing sector, which has the largest volume of inventory assets, its share of total manufacturing inventory assets expanded from 24.7% in the second quarter of last year to 27.9% in the second quarter of this year.

KCCI explained, "Since the second half of last year, companies increased supply in response to the COVID-19 special demand, and to cope with the sharp rise in international oil and raw material prices, companies excessively secured raw materials and投入ed them into production. Additionally, product shipments were delayed due to global supply chain disruptions," adding, "This is not only the case in Korea but also in other countries, and since it is a short-term issue, companies have expected that it could be resolved soon if global demand supports it."

However, KCCI expressed concerns, stating, "The outbreak of the Russia-Ukraine war, global inflation, and the continuous interest rate hikes in the United States are rapidly shrinking the global demand base."

Kang Seok-gu, head of the KCCI Research Department, said, "Since a comprehensive export strategy including recent trade balance improvement and mid- to long-term export competitiveness enhancement support has been announced, it is necessary to promptly implement it. At the same time, various programs to stimulate domestic demand, such as Korea Sale Festa and Donghaeng Sale, should be prepared and executed in the second half of the year," adding, "It is also an urgent task to improve Korea's high-cost economic structure through structural reforms in regulation, labor, finance, and education to prevent the deterioration of corporate profitability from leading to production decline, employment, and investment contraction."

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