A state research institute pointed out that the uncertainty in domestic politics, which expanded into a political impeachment crisis after the emergency martial law, is dampening economic sentiment and heightening the risks of an economic downturn. The Korea Development Institute (KDI) diagnosed that the household and corporations' sentiment indices have significantly dropped since President Yoon Suk-yeol announced the emergency martial law on Dec. 3.
In the January 2025 edition of 'Economic Trends' published on the 8th, KDI analyzed, "As the production increase centered on the construction industry slows down, the improvement in the economy has been delayed, and political uncertainty has expanded, leading to a dampened economic sentiment."
Domestic political uncertainty has emerged as a factor that sharply cools consumer sentiment indices. According to KDI, the consumer sentiment index for December recorded a significant drop to 88.4, compared to the previous month (100.7). In particular, the current economic assessment dropped significantly from 70 to 52, and the outlook for the future economy decreased from 74 to 56.
KDI analyzed, "Compared to the past periods of political instability (October 2016), the rises in the won-dollar exchange rate and the CDS premium were limited, but the sentiment of households and corporations has significantly weakened." The consumer sentiment index fell by 9.4 points over three months in 2016, but this time it dropped by 12.3 points within a month after Dec. 3.
Whether the dampening of sentiment has led to an actual contraction in consumption is expected to be confirmed in the industrial activity trends for December 2024, which will be announced at the end of this month.
Overall industrial production recorded a decrease of 0.3% in November. Production in the construction industry (-12.9%) expanded its decline compared to the previous month (-10.8%). Despite a high production increase in semiconductors (11.1%), production decreased in automobiles (-6.7%) and electronic components (-10.2%), resulting in a mere 0.1% increase in manufacturing production.
The inventory ratio remained high at 111.8%, following the previous month's figure (112.3%). The average operating rate also fell from 72.3% to 71.8%. KDI analyzed, "Indicators suggesting a slowdown in manufacturing production are gradually increasing."
Domestic demand shows signs of prolonged recovery delays due to prolonged sluggishness in the household consumption and institutional sector investment.
Retail sales in November expanded their decline (-0.9%→-1.9%). Key items such as passenger cars (-7.9%), home appliances (-4.5%), communication devices and computers (-6.2%), and cosmetics (-9.8%) showed a worsening decline. Service consumption also showed a slight increase, particularly in key sectors such as accommodation and food services (0.1%) and arts, sports, and leisure services (0.3%). However, the education services sector (-0.5%) showed a decline.
Facility investment continued a moderate recovery trend (2.6%) as semiconductor-related investments improved, but construction investment remained sluggish due to an expanded decrease in construction performance (-10.8%→-12.9%).
In facility investment, significant increases continued, led by machinery (9.7%) and semiconductor manufacturing equipment (63.3%).
Although leading indicators for construction contracts (current, 62.9%) showed a significant increase due to base effects and the public sector's expansion of housing supply, KDI projects, "The improvement in construction contracts is expected to be reflected in construction investment with a considerable time lag."
The labor market continued a trend of moderate slowdown. The number of employed persons increased by 123,000 compared to the previous year in November, recording a low increase following the previous month (83,000). The decline was significantly larger in the construction industry (-96,000) and manufacturing industry (-95,000).
The consumer price inflation rate was recorded at 1.9%, higher than the previous month (1.5%), but remained below 2%. While consumer prices, particularly for volatile petroleum products, rose, the underlying trend of price increases continued to slow due to sluggish domestic demand. KDI noted, "The dampening of consumer sentiment could act as additional downward pressure."