SMEs "Second Half Economic Outlook Darker Than Last Year... Impact of Rising Raw Material Prices and Domestic Demand Slump"

[Asia Economy Reporter Donghyun Choi] Small and medium-sized enterprises (SMEs) expect the economic conditions in the second half of this year to worsen compared to the same period last year.

The Korea Federation of SMEs conducted a survey on the Small Business Health Index (SBHI) for the second half of this year from the 15th to the 24th, targeting 500 SMEs, and recorded a score of 87.6. This is a 4-point drop compared to the same period last year (91.6). An economic outlook index above 100 indicates that more companies responded positively than negatively, while a score below 100 indicates the opposite.

By industry, in the 'manufacturing sector,' ▲Other transportation equipment (127.3), ▲Leather, bags, and footwear (104.6), and ▲Printing and recorded media reproduction (100.0) expected improvement. Conversely, ▲Pulp, paper, and paper products (54.2), ▲Textile products (54.2), and ▲Electrical equipment (68.2) sectors anticipated deterioration.

In the 'service sector,' ▲Arts, sports, and leisure-related services (112.0) and ▲Transportation (100.0) forecasted business improvement. On the other hand, ▲Real estate and rental services (60.0), ▲Wholesale and retail trade (84.0), and ▲Repair and other personal services (86.0) are expected to perform poorly.

Regarding the perceived business performance and outlook by category, sales (84.1→91.2), operating profit (81.2→87.7), financial conditions (81.4→88.9), and factory operating rates (89.4→91.2) are all expected to slightly improve compared to the first half of the year. The inverse indicators, such as workforce and facility levels, are expected to remain insufficient as in the first half.

The Federation also surveyed the current management difficulties faced by SMEs. The biggest difficulty experienced in the first half was the rise in raw material prices (62.6%), followed by sluggish domestic demand (35.2%), labor shortages (29.8%), interest rate hikes (25.2%), and minimum wage increases (22.8%).

For the second half, anticipated difficulties are raw material price increases (58.8%), sluggish domestic demand (31.2%), labor shortages (29.8%), interest rate hikes (28.4%), and minimum wage increases (19.4%). However, the proportion of responses citing raw material price increases (down 3.8 percentage points) and sluggish domestic demand (down 4.0 percentage points) decreased, while interest rate hikes increased by 3.2 percentage points. In both halves, manufacturing cited ‘raw material price increases’ as the biggest management difficulty, while the service sector pointed to ‘sluggish domestic demand’ in the first half and ‘labor shortages’ in the second half.

Regarding the timing of recovery to pre-COVID-19 business performance levels, the largest share of respondents (27.0%) selected after 2024, followed by the first and second halves of 2023 (23.0%), the second half of 2022 (14.8%), and the first half of 2022 (12.2%). The later the expected recovery, the higher the response rate, indicating somewhat dampened expectations for business improvement among SMEs.

The top management strategy for the second half of this year was strengthening internal management (36.2%), followed by risk management (19.2%), external growth (18.8%), expanding participation in sustainable management (17.2%), and enhancing growth potential (8.6%).

Due to concerns about the economic outlook for the second half, 55.4% of responding companies plan conservative management strategies such as strengthening internal management (36.2%) and risk management (19.2%).

Regarding the most necessary policies for small business owners and SMEs (multiple responses allowed), respondents indicated tax and various burden reductions (61.4%), financial support (45.0%), resolution of labor shortages (34.6%), stabilization of raw material supply (28.6%), and flexible working hours (20.0%) as priorities.

Jumoon Gap Choo, Head of Economic Policy at the Korea Federation of SMEs, said, "Recently, the ‘new three highs’ of high prices, high interest rates, and high exchange rates, along with global economic slowdown and worsening domestic and international economic conditions, seem to have prevented a significant improvement in SMEs’ economic sentiment compared to last year. It is necessary for the government to remove obstacles to corporate activities through bold regulatory reforms alongside economic revitalization measures such as tax improvements and strengthened financial support."