KDI "Economic Slump Continues Due to Export Contraction and Domestic Demand Slowdown"

Recently, South Korea's economy has continued to experience a downturn as domestic demand weakens amid shrinking exports, according to an analysis by a government-affiliated research institute. The worsening external conditions have led to sluggish exports, resulting in a contraction in the manufacturing sector.

The Korea Development Institute (KDI) analyzed in the March issue of its 'Economic Trends' report published on the 8th that "recently, exports to China by region and semiconductors by product category have continued to underperform." Following last month's analysis that "the widening decline in exports and weakening domestic demand recovery are deepening the economic slowdown," KDI issued a diagnosis this month that the economic downturn is persisting.

Jung Kyu-chul, head of KDI's Economic Outlook Office, said, "The manufacturing sector is showing signs of contraction, with semiconductor-centered production sharply declining and inventories surging," adding, "due to the manufacturing slump, facility investment has decreased and the pace of employment growth has slowed."

Exports in February showed a narrower decline compared to the same month last year (-16.6%), but the average daily export volume decreased by 15.9%, similar to the previous month (-14.6%). By product, on an average daily basis, automobile exports increased by 9.0 percentage points to 33.7% compared to the previous month (24.7%), while the mainstay semiconductor sector saw its export decline widen from -43.2% in the previous month to -47.7%, continuing its sluggish trend. By region, the average daily export decline to China expanded by 1.3 percentage points to -31.1% compared to the previous month (-29.8%), and the average daily export decline to regions excluding China also increased from -9.8% to -11.1% during the same period.

[Image source=Yonhap News]

Consumption weakened as retail sales continued to slump and the growth rate of service sector production also slowed. In January, consumption (retail sales) saw a reduced decline in durable goods at -3.5% compared to the previous month (-6.6%), but decreases persisted mainly in home appliances (-11.5%) and communication devices and computers (-4.5%). The consumer sentiment index, compiled as of February, stood at 90.2, down from 90.7 in the previous month.

Inflation also eased as supply-side price pressures, such as falling international oil prices, gradually diminished and domestic demand weakened. The consumer price index in February rose by 4.8%, lower than the 5.2% increase in the previous month. While electricity, water, and gas maintained a high increase rate of 28.4%, similar to the previous month (28.3%), the rise in petroleum products narrowed.

Facility investment in January grew by 3.9%, lower than the 3.2% increase in the previous month, due to continued manufacturing sector weakness centered on semiconductors. The average operating rate in manufacturing was 70.9%, significantly below the previous month’s 68.3% and the 2022 annual average of 74.8%. The Bank of Korea’s March facility investment business survey index (BSI) forecast (88) also declined from 90 in the previous month.

Construction investment showed mixed trends, with an expanded increase in the building sector but continued sluggishness mainly in civil engineering. The construction output (constant prices) in January remained at a low growth rate of 0.9%, following 0.5% in the previous month, mainly driven by the building sector. Due to the housing market downturn, housing permits (-43.7% → -45.9%) and housing starts (-69.1% → -17.2%) continued to decline sharply compared to the previous month, raising concerns about constraints on future construction investment recovery. The manufacturing sector downturn has also weakened employment growth, as evidenced by a reduced increase in the number of employed persons.

KDI noted, "Although sentiment indices have improved with expectations of economic recovery following China's reopening, real economic indicators remain sluggish," adding, "Expectations for economic recovery centered on the service sector after China's reopening are reflected in improved domestic and international service-related sentiment indices." Jung said, "However, exports to China remain depressed, and China's real economic indicators continue to underperform, so the positive impact of China's reopening on the real economy has yet to materialize."

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