[Corporate Inventory Crisis] King Dollar and Inventory Bomb... Stagflation Intensifies

Corporate Inventory Sees Largest Increase in 26 Years
Management Outlook Remains Unclear
Production Surges but Demand Falls Short
Urgent Support Needed to Ease Corporate Cost Burden

[Asia Economy Reporters Hyungil Oh, Donghoon Jung, and Seoyoon Choi] Corporate inventories have increased the most in 26 years since the Asian financial crisis. This is interpreted as a strong indication of a full-fledged economic recession with declining demand, rather than a temporary adjustment due to external factors. [Related Article] 'Corporate Inventory Emergency'

Concerns are growing that stagflation?where economic recession and inflation occur simultaneously?may be intensifying as demand decreases while raw material-driven price increases have yet to be resolved.

According to the 'Recent Economic Situation Assessment Based on Corporate Activities' report released by the Korea Chamber of Commerce and Industry on the 16th, the manufacturing inventory index growth rate in the second quarter recorded 18.0%, marking the largest increase in 26 years since the second quarter of 1996 (22.0%), just before the Asian financial crisis.

Corporate inventories fluctuate with economic cycles, but the recent trend of inventory growth has shown an unusual pattern of rising for four consecutive quarters since the second quarter of last year. This is the first time in four years since 2017 that the inventory index has shown a sustained upward trend on a quarterly basis.

In particular, large corporations are holding relatively more inventory. By company size, the inventory index growth rate for large corporations soared from -6.4% in the second quarter of last year to 22.0% in the second quarter of this year, while small and medium-sized enterprises (SMEs) showed a relatively moderate increase from 1.2% to 7.0%.

Analysis of about 1,400 listed manufacturing companies shows that large corporations' inventory assets increased from KRW 61.477 trillion in the second quarter of last year to KRW 89.103 trillion in the second quarter of this year, whereas SMEs' inventory assets rose only from KRW 7.437 trillion to KRW 9.501 trillion.

Despite the recent depreciation of the Korean won, exports have not increased, and consumption is also struggling to grow due to rising prices. Some view this as an entry into stagflation. Professor Tae-yoon Sung of Yonsei University said, "The biggest problem with stagflation is rising costs," adding, "Policies that reduce corporate burdens, such as tax cuts or regulatory improvements to lower cost pressures, are necessary."

Exports Struggle Despite King Dollar... Economic Recession Intensifies

Although the won-dollar exchange rate is approaching 1,400 won in the 'King Dollar' era, domestic companies are struggling in overseas markets. The notion that a rising exchange rate is beneficial for exports is now outdated.

Key export items like semiconductors have turned to a decline after 26 months, and although automobiles and petroleum products have driven export performance thanks to eco-friendly trends and high oil prices, the outlook for the second half of the year remains bleak. As consumption decreases and products do not sell, inventories are piling up in corporate warehouses. With downward pressure on the economy increasing, companies cannot see even an inch ahead in their management outlook.

According to an analysis conducted by the Korea Chamber of Commerce and Industry on about 1,400 listed manufacturing companies that disclose financial statements quarterly, manufacturing inventory assets totaled KRW 140.986 trillion at the end of the first half, a 39.7% increase compared to KRW 100.897 trillion in the same period last year.

By industry, inventory asset growth rates were particularly high in non-metallic mineral products (79.7%), coke, coal, and petroleum refined products (64.2%), electronic components, computers, audiovisual and communication equipment manufacturing (58.1%), and primary metals (56.7%).

Especially in the electronic components, computers, audiovisual and communication equipment manufacturing sector, which holds the largest volume of inventory assets, its share of total manufacturing inventory assets increased from 24.7% in the second quarter of last year to 27.9% in the second quarter of this year.

The Chamber explained, "Since the second half of last year, companies increased supply in response to COVID-19 special demand, and to cope with the sharp rise in international oil and raw material prices, companies overstocked raw materials for production. Additionally, global supply chain disruptions delayed product shipments," adding, "This is not only the case in Korea but also in other countries, and companies had hoped that these short-term issues would be resolved soon if global demand held up."

However, they expressed concern, stating, "The outbreak of the Russia-Ukraine war, global inflation, and the continuous interest rate hikes in the U.S. have rapidly shrunk the global demand base."

Concerns Over Reduced Hiring and Investment Due to Inventory Burden

Professor Chunwoo Lee of the University of Seoul explained, "Production of some products like semiconductors surged over the past two years, but contrary to expectations, global demand did not support this, resulting in capital being tied up in inventory assets," adding, "Unexpected variables such as the Russia-Ukraine war and China's strict 'Zero COVID' policy have also caused companies' demand forecasts to miss the mark."

It is pointed out that as inventories accumulate and funds do not circulate, this will affect investment and the labor market.

Professor Jeonghee Lee of Chung-Ang University said, "Accumulating inventory means that money is no longer circulating from the company's perspective," adding, "Companies will have no choice but to reduce production, and if production decreases, fewer workers will be needed, which will ultimately impact the employment market."

Kang Seok-gu, head of the Korea Chamber of Commerce and Industry's research division, said, "The government has announced a comprehensive export strategy including improving the trade balance and supporting mid- to long-term export competitiveness, and it must be implemented promptly," adding, "To prevent worsening corporate profitability from leading to reduced production, employment, and investment, structural reforms in regulation, labor, finance, and education to improve Korea's high-cost economic structure are also an urgent task that can no longer be delayed."