'Foreign Exchange Crisis-Level' Accumulated Inventory... Production Cuts → Domino Effect of Economic Recession

Pent-up Effect Fades and Export Slowdown... Manufacturing Inventory Ratio Surges to 120% Range
Semiconductors Soar 52%P in One Year... Chemicals, Primary Metals, and Machinery Also Rise Sharply
Production Cuts Begin in Q3 Due to Export Slowdown... Employment and Facilities Expected to Decrease with Time Lag

[Asia Economy Sejong=Reporter Kwon Haeyoung] Another sign that the Korean economy, plunged into chaos starting with the tightening of funds in the corporate bond market, should pay attention to is the inventory ratio soaring to levels comparable to the foreign exchange crisis. Due to demand contraction amid global economic recession concerns in the US, China, and Europe, inventories have significantly increased, especially in semiconductors, which are the backbone of our economy. As the global consumption cliff and export slowdown caused by worsening domestic and international conditions materialize, concerns are spreading that if companies suffering from inventory problems proceed with production cuts, the already rapidly freezing economy will face an even harsher winter next year.

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 exceeded 120% in June this year at 124.2%, followed by 124.5% in July, marking three consecutive months above 120%.

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 last three months that the inventory ratio has surged to the 120% range since September 1998 (122.9%), when the International Monetary Fund (IMF) foreign exchange crisis had a significant impact.

Inventory is a leading economic indicator that companies are sensitive to. The recent sharp rise in the inventory ratio means that companies are producing products but the speed at which they accumulate in warehouses is increasing because they are not selling in domestic and overseas markets. This is interpreted as demand weakening due to the disappearance of the COVID-19-related 'pent-up effect' (explosive consumption after suppression), the Ukraine war, high inflation, and monetary tightening in major countries rapidly cooling the economy, and export conditions worsening.

Looking at major industries, the semiconductor inventory ratio, the largest export item, recorded 99.7% in August this year, soaring 52.2 percentage points from 47.5% in August last year. The semiconductor inventory ratio fell to 52.2% in January and 47.5% in August last year due to demand recovery after the COVID-19 outbreak and global supply chain instability, which caused a severe semiconductor shortage. It then rose to 60.0% in January this year but surged close to 100% as demand sharply contracted amid recession concerns. Earlier, the Ministry of Trade, Industry and Energy also expressed concerns about the semiconductor inventory ratio when announcing export-import trends in September. The ministry explained, "Due to weak demand and inventory accumulation, memory prices fell, leading to a decrease in semiconductor exports."

Other industries with high inventory ratio weights also saw sharp increases compared to a year ago. The chemical products industry rose 19.0% from 112.9% in August last year to 131.9% in August this year; primary metals increased 19.1 percentage points from 102.5% to 121.6%; and machinery equipment rose 5.3 percentage points from 109.1% to 114.4%. Only the automobile industry saw its inventory ratio decrease by 17.5 percentage points from 170.6% to 153.1%. Such a rapid increase in inventory is worrisome as it could lead to deteriorating corporate profitability and reductions in production and investment, pouring cold water on the freezing economy. In fact, the manufacturing operating rate index was 75.2% in August, down 1.0 percentage point from the second quarter average of 76.2%.

The problem is that amid the possibility of a global economic recession next year, export performance is rapidly slowing, and there is no sign of improvement in the manufacturing economy. According to Ministry of Trade, Industry and Energy statistics, the monthly export growth rate maintained double digits from March last year but fell to single digits from June to September this year. Even this turned negative at -5.5% from the 1st to the 20th of this month. The composite leading index cyclical component from Statistics Korea, which predicts future economic conditions, recorded 99.3 in August, down 0.2 points from the previous month. If the economy plunges sharply, the vicious cycle of 'global demand slowdown → inventory increase → corporate profitability deterioration → production and investment reduction → economic recession' is likely to accelerate. The rapid interest rate hikes by central banks worldwide are also expected to accelerate the consumption cliff.

Major institutions such as the IMF have already forecast a faster-than-expected economic downturn. The IMF recently lowered South Korea's growth forecast for next year from 2.1% to 2.0%, a 0.1 percentage point drop. The global growth forecast was also lowered by 0.2 percentage points to 2.7%. In particular, China's economy, which South Korea heavily depends on, was lowered by 0.2 percentage points from 4.6% to 4.4%. Both domestic demand and export outlooks are bleak.

There is also analysis that companies have entered a full-fledged recession phase from the third quarter by cutting production due to 'malignant inventory' and export slowdown. Cho Seonghwan, team leader of the Economic Policy Office at the Korea Chamber of Commerce and Industry, said, "With inventory increases in the second quarter, companies likely reduced production in the third quarter, lowering factory operating rates," adding, "This is expected to lead to reductions in employment and new facility investments with a time lag."

Joo Won, head of the Economic Research Office at Hyundai Research Institute, predicted, "As the global economy enters a recession phase, export growth rates will turn negative within the year," and added, "If overseas demand continues to weaken, companies will cut production to reduce inventory, potentially further shrinking the economy."

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