Small and Medium Manufacturing Industry, Business Conditions Have Improved but...

Moderate Recovery Seen in Small and Medium Manufacturing Average Operating Rate
Experts Agree "Too Early to Be Optimistic"
Lag of 2-3 Months for High-Intensity Social Distancing Effects Last Year to Show in Industrial Indicators
Employment Down 82,000 in One Year... "Support Funds' Effect Wearing Off"

Gyeongbuk Gumi Industrial Complex panorama. The photo is unrelated to specific expressions in the article. [Photo by Asia Economy DB]

[Asia Economy Reporter Junhyung Lee] #"The full impact of the strengthened social distancing measures implemented during the year-end and New Year period has not yet fully surfaced. Indicators related to small and medium-sized manufacturing industries show signs of decline, with operating rates falling back to the 60% range." (Noh Minseon, Head of Future Strategy Research Group, Small and Medium Business Research Institute)

#"Operating rates in small and medium-sized manufacturing industries have fluctuated depending on the sector, but the outlook for traditional manufacturing industries such as machinery and apparel remains bleak this year as well." (Kim Taegi, Professor of Economics, Dankook University)

Although the business conditions of small and medium-sized manufacturing industries have shown a gradual recovery since the second half of last year, experts unanimously agree that "it is still difficult to be optimistic." The high-intensity social distancing measures that began at the end of last year have not yet fully emerged on the surface, and experts explain that there is usually a lag of about 2 to 3 months before statistics that can gauge the economic situation are confirmed as objective figures.

The average operating rate of small and medium-sized manufacturing industries in January this year, as surveyed and announced by the Korea Federation of SMEs on the 26th, was 69.6%. Considering that the operating rates in the fourth quarter of last year were 69.5% in October, 70.2% in November, and 69.9% in December, this is a similar level.

Due to the spread of COVID-19 last year, the average operating rate of small and medium-sized manufacturing industries fell to 66.2% in May but has since shown a gradual recovery. Considering that the average operating rate over the past 10 years since 2010 was 72.3%, the current figure is quite close to the average.

However, experts believe it is premature to be optimistic. The shock from the high-intensity social distancing measures that began in November last year is likely to soon surface. Industrial indicators such as the average operating rate are lagging indicators of the economy and have limitations in reflecting the current business conditions in real time. Another reason is that changes in consumer sentiment caused by social distancing gradually spread throughout the industry. In fact, the average operating rate of small and medium-sized manufacturing industries hit its lowest point (66.2%) in May, three months after the COVID-19 outbreak in February last year. At that time, the social distancing level was at the ‘everyday life distancing’ stage, around level 1 to 1.5.

Related statistics such as employment status also support the cautious outlook. According to Statistics Korea, the number of employees in small and medium-sized manufacturing industries last month was about 3.54 million, a decrease of 82,000 compared to a year ago. According to the Business Survey Index (BSI) announced recently by the Bank of Korea, the BSI for small and medium-sized manufacturing industries this month recorded 69, down 9 points from the previous month. A BSI below 100 means that more people believe the economy has worsened. Lee Hanggu, Senior Research Fellow at the Korea Institute for Industrial Economics & Trade, said, "It seems that the effect of government subsidies provided to manufacturing since around the second quarter of last year is wearing off," adding, "They are probably holding on but gradually starting to lay off people."

Noh Minseon, Head of Future Strategy Research Group at the Small and Medium Business Research Institute, also explained, "The manufacturing crisis that became visible since 2015 has accelerated due to COVID-19," and "small and medium-sized manufacturing industries are experiencing a double burden in terms of employment and overall business environment."