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Output and investment continue to fall

Korea Inc. is making less, spending less and losing confidence
Aug 01,2018
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Economics is proving to be a major challenge for the Moon Jae-in government, with the latest indicators suggesting more disappointing results for Korea Inc.

According to Statistics Korea on Tuesday, Korea’s industrial output in June has fallen to its lowest point in three months, but even more concerning is the continuing decline of companies’ investments.

Company investments in factories and machinery have been declining for four consecutive months, the longest fall in 18 years. The last time investment fell for so long was between September and December 2000.

The overall industrial output for June fell 0.7 percent compared to the previous month. Earlier in the year, industrial output fell 0.9 percent in March but bounced back in April and May before starting to drop again.

Mining and manufacturing industry production fell 0.6 percent. Manufacturing alone saw a 0.8 percent drop, dragged down mainly by the automotive and chemical industry.

The service sector, on the other hand, grew 0.2 percent thanks to the expansion of the health and welfare businesses and the financial market.

Consumption in June grew 0.6 percent compared to May with sales of nondurable goods, such as food and beverages, up. The statistics agency attributed the increase in sales to the 2018 Russia World Cup and an increase in the number of foreign tourists.

But the warning light came from companies’ lackluster investment. In June, companies investing in factories and machinery fell 5.9 percent. Even when compared to a year ago, investment has fallen 13.8 percent.

The statistics agency said the continuing drop is largely because companies are no longer investing in semiconductor production lines after a prolonged period of investment from late 2016 until the start of this year.

“Because massive investments were made for nearly a year, it would be difficult to expect investments of such size in the immediate future,” said a statistics agency official.

But according to a report by the Korea Center for International Finance on Tuesday, major international think tanks such as Barclays and Citi raised concerns of the impact from falling corporate investment.

The same concern was raised by the Korean central bank. When announcing its readjusted economic growth outlook earlier last month, the Bank of Korea (BOK) noted that investment in factories and machinery has decelerated sharply and will likely see low growth next year.

It said that the falling operation rate and growing trade protectionism are stopping companies from expanding their investments.

In fact, businesses have a gloomier position as their confidence has fallen sharply. According to the BOK on Tuesday, July’s business sentiment index fell five points from the previous month to 75. When the index is below 100, it indicates that the majority of businesses are pessimistic about the economy. Last month’s drop in confidence is the sharpest since June 2015, when business confidence tumbled nine points after the Middle East respiratory syndrome scare brought the economy to a screeching halt.

In the survey of 1,966 manufacturers, 20.9 percent blamed the waning confidence on the sluggish domestic market. However, the burden on rising labor costs was considered to be the second-largest reason with 14.2 percent while 12.6 percent cited economic uncertainty.

The situation was similar for the 1,303 nonmanufacturing companies, with 17.1 percent blaming the sluggish domestic market followed by labor costs at 14.4 percent. The manufacturing industry’s confidence fell six points to 74, also the sharpest drop since June 2015 when it lost seven points.

The confidence of the nonmanufacturing industry also fell, losing four points as sales are expected to drop with the beginning of the summer vacation season.

Meanwhile, the government announced that it will immediately implement the lowered individual consumption taxes levied on automobile purchases, which is part of a raft of economic policies announced earlier this month in the hope of boosting the local economy.

The Ministry of Strategy and Finance said the government decided during a cabinet meeting to implement the lower individual consumption taxes on vehicles that have rolled off the production line since July 19.

The individual consumption tax will be lowered from 5 percent to 3.5 percent until the end of this year.

The government estimates that consumption in the private sector will see an increase between 0.1 and 0.2 percentage points. This will help raise the nation’s economic growth by 0.1 percentage points.


BY LEE HO-JEONG [lee.hojeong@joongang.co.kr]