China Faces Raw Material Supply Challenges, Manufacturing Outlook Negative... Non-Manufacturing Positive

Manufacturing and Non-Manufacturing Sectors Show Divergent Economic Outlooks for Two Consecutive Months

[Asia Economy Reporter Jeong Hyunjin] The economic outlook for manufacturing and non-manufacturing sectors for next month continues to diverge for the second consecutive month. While manufacturers foresee a negative economic outlook next month due to difficulties in raw material and component supply caused by China, non-manufacturing companies expect the economy to improve influenced by factors such as the With-Corona policy.

On the 23rd, the Korea Economic Research Institute under the Federation of Korean Industries conducted a Business Survey Index (BSI) on 600 major companies by sales volume. The December BSI outlook was 100.3. Since August (95.2), the index has remained above the baseline for four consecutive months, maintaining an expectation of economic improvement, but the index value has declined for two consecutive months since October. By sector, the December manufacturing outlook was 96.5, below the baseline of 100.0, marking two consecutive months of sluggishness following November (96.5). Meanwhile, the non-manufacturing outlook was 104.8, showing a positive trend for three consecutive months following October (106.9) and November (105.9).

(Data provided by Hankyung Research Institute)

The Korea Economic Research Institute identified the main cause of the sluggish domestic manufacturing outlook as difficulties in raw material and component supply due to disruptions in Chinese industrial production. Korea's supply chain structure has a higher dependence on Chinese intermediate goods imports compared to major countries such as Japan and the United States. China's power production has been declining since July, and the Chinese manufacturing PMI has remained below the baseline of 50 since September, indicating continued poor business conditions.

Regarding the optimistic comprehensive economic outlook for the non-manufacturing sector, the Korea Economic Research Institute attributed it to factors improving consumer sentiment, such as the implementation of the With-Corona policy and the year-end shopping season. In fact, since discussions about transitioning to With-Corona began in September, domestic credit card approval growth rates and consumer sentiment indices have risen for two consecutive months. Additionally, increased demand for city gas during winter is also evaluated to have contributed to the improved outlook for the non-manufacturing sector.

Looking at detailed sectors, among manufacturing industries, the most negative economic outlook for December was in petroleum refining and chemicals (79.3) and non-metallic materials and products (87.5), sectors heavily affected by supply imbalances originating from China. Conversely, among non-manufacturing sectors, the most positive outlook for December was in information and communications (136.8) and electricity, gas, and water supply (131.3).

By category, employment (107.1), domestic demand (102.4), investment (100.8), and inventory (97.8) showed positive prospects, whereas exports (96.5), profitability (96.5), and financial conditions (98.6) were predominantly negative. The Korea Economic Research Institute pointed out that rising raw material prices and increased market interest rates have worsened profitability and financial conditions.

Choo Kwang-ho, head of the Economic Policy Office at the Korea Economic Research Institute, stated, "The recent shortage of diesel exhaust fluid and other issues have highlighted Korea's supply chain risks due to dependence on specific foreign countries for key raw materials and components." He urged, "The government should work to resolve supply chain bottlenecks and promote stable supply and pricing of manufacturing intermediate goods."