Manufacturing Inventory Rate at 'Foreign Exchange Crisis Level'... Growing Warning Signs of Economic Recession

Manufacturing Inventory Ratio at 120% for 3 Consecutive Months
'Consumption Cliff' Realized as Semiconductor Inventory Surges...Fear of Economic Recession Spreads

[Asia Economy Sejong=Reporter Kwon Haeyoung] Amid growing concerns about economic recession centered on the United States, China, and Europe, the domestic manufacturing inventory ratio has exceeded the 120% level for three consecutive months. Since September 1998 (122.9%), the inventory ratio has only surged to the 120% level temporarily in May 2020 due to logistics difficulties immediately after the outbreak of COVID-19. In particular, as the global 'consumption cliff' becomes a reality, inventories have rapidly increased, especially in semiconductors, Korea's export star item, spreading fears of an economic recession.

According to Statistics Korea on the 25th, the manufacturing inventory ratio (inventory to shipment ratio) rose from 111.0% in August last year to 124.0% in August this year. Accordingly, the manufacturing inventory ratio, which exceeded 120% at 124.2% in June this year, recorded the 120% level for three consecutive months, with 124.5% in July.

Excluding May 2020 (127.5%), when the inventory ratio temporarily rose due to logistics difficulties immediately after the COVID-19 outbreak, this is the first time in the past three months that the inventory ratio has surged to the 120% level since September 1998 (122.9%), when the International Monetary Fund (IMF) foreign exchange crisis had a significant impact. In particular, the inventory ratio of semiconductors, the largest export item, recorded 99.7% in August this year, soaring 52.2 percentage points from 47.5% in August last year.

The sharp rise in the inventory ratio means that companies are producing products but they are not selling in domestic and overseas markets, causing them to accumulate rapidly in warehouses. This is interpreted as the export economy worsening due to demand slowdown amid concerns about economic recession in major countries such as the United States and China.

The rapid increase in inventories is worrisome because it can lead to a deterioration in corporate profitability and a decrease in production and investment, which could further accelerate the cooling of the already frozen economy. In fact, the manufacturing operating rate index stood at 75.2% as of August, down 1.0 percentage point from the second quarter average (76.2%).

Moreover, as the consumption capacity decreases due to the rapid interest rate hikes by central banks of various countries, the problem is that 'malignant inventories' caused by unsold products may increase in the future. The IMF recently lowered its global growth forecast for next year from 2.9% to 2.7%, a 0.2 percentage point drop, signaling a faster-than-expected economic downturn.

Cho Seonghwan, team leader of the Economic Policy Office at the Korea Chamber of Commerce and Industry, said, "Recently, manufacturing inventories have unusually surged in a short period, increasing concerns about economic uncertainty," adding, "Due to the inventory increase in the second quarter, companies are expected to reduce production in the third quarter, lowering factory operating rates, which will subsequently lead to declines in employment and new facility investments, negatively impacting the economy."

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