The Korea Development Institute (KDI) diagnosed that household and corporations sentiment indicators have escaped the shock of political instability from December last year. However, it assessed that the downward risk to the economy is expanding due to poor performance in the construction sector and worsening export conditions. KDI has been warning about the expanding economic downward risk for three consecutive months.
In the 'March Economic Trends' published on the 10th, KDI analyzed that "political instability is easing," and that "the sentiment indicators of households and corporations are still low, but they show signs of recovery from the sharp decline at the end of last year."
The consumer sentiment index released by the Bank of Korea for February was 95.2, improving by 4 points from January (91.2). The consumer sentiment index was above 100 until November last year, but it plummeted to 88.2 in December and is showing gradual improvement. The Business Survey Index (BSI) for corporations is also gradually improving. The manufacturing BSI from the Bank of Korea increased from 62 in December last year to 63 in January and 65 in February.
However, KDI pointed out that "the prolonged weakness in construction investment and the reduction in export growth are heightening the downward risk to the economy." In January, facility investment recorded a decline of -3.1%, and the weakness in construction investment deepened. The construction output in January decreased by 27.3% compared to the same month last year. This is a deterioration from the decrease rate of -7.4% compared to the same period last year in December. Both architecture (-29.2%) and civil engineering (-20.1%) recorded larger declines compared to December last year (-5.1%·-12.1%).
KDI explained, "While the significant decrease in construction output was partly due to base effects, it has also continued to decline for six consecutive months compared to the previous month, indicating that the construction market has been sluggish," and noted that "the slowdown in the real estate market has weakened improvements in leading indicators."
Exports also seem to be slowing down. The previously high export growth in the ICT institutional sector is being adjusted, while other export items are also continuing their decline.
Last month, exports increased by 1% compared to February of the previous year, but on a daily average basis, there was a 5.9% decrease. Both the average daily exports of ICT (-5.1%) and non-ICT (-6.2%) decreased compared to February of last year. The average export from January to February, excluding the impact of the Lunar New Year, also decreased by 4.8% compared to the same period last year, indicating a slowdown in goods exports.
KDI noted that "the increase in U.S. tariffs could significantly affect our exports," explaining that "exports of automobiles to the U.S. account for 6.3% of total exports, while ICT represents 2.5%, and general machinery accounts for 2.2%."
Domestic demand also remains weak. Retail sales in January showed a temporary stabilization due to the Lunar New Year, but the trend continued to be sluggish amid high-interest rates and depressed consumer sentiment. Consumption of food and beverages increased by 13% compared to the same month last year, but durable goods such as communication devices, computers, and home appliances decreased by 10.7%. There was also a decline of 0.6% compared to the previous month, indicating weak consumer spending.
Production in major service sectors closely linked to consumption also showed a declining trend. In January, the production of the accommodation and restaurant sector decreased by 3.3% compared to January of last year, while education services and arts, sports, and leisure services also decreased by 1.7% and 0.4%, respectively.
KDI stated that with sluggish performance in construction and consumption, the trend in employment growth is also slowing down. In January, the number of employed individuals increased by only 135,000 compared to January of last year. The number of employees in the wholesale and retail sector closely tied to domestic demand decreased by 91,000, and the number of those employed in the struggling construction sector declined by 169,000. KDI analyzed that "while the number of temporary jobs, which have a higher share of government jobs, has increased, self-employed individuals and day laborers have continued to decline."
Meanwhile, KDI viewed that although the global economy is continuing a slow growth trend, uncertainty regarding global trade conditions remains high.
The U.S. economy has seen a reduction in manufacturing weaknesses, but consumer sentiment and service sector sentiment have sharply contracted. The Eurozone economy has shown signs of recovery in goods consumption, but production reductions and high political uncertainty are sustaining sluggish economic performance. China is also facing ongoing economic uncertainties due to poor sentiment in real estate investment, manufacturing, and trade conflicts.
KDI stated that "increased imports by the U.S. in anticipation of tariff increases have led to an increase in global goods trade and a recovery phase in manufacturing conditions," but added that "concerns about economic growth slowdowns are being raised due to uncertainties in trade policies and poor performance in leading indicators."