The Bank of Korea: "Manufacturing Inventory to Remain High for a While... Improvement Expected in the Second Half"

[Image source=Yonhap News]

Manufacturing inventory is expected to remain at a high level for the time being due to a slowdown in growth, but gradually improve in the second half of the year influenced by factors such as China's reopening (resumption of economic activities).

The Bank of Korea stated in its March Monetary and Credit Policy Report released on the 9th, "Manufacturing inventory is expected to remain high for the time being but improve in the second half of the year due to production adjustments by manufacturers and demand recovery following China's reopening."

Since economic recovery can only become visible once the inventory burden is somewhat alleviated, there is significant interest in the recent inventory situation and outlook for manufacturing, wholesale and retail, and construction industries.

The Bank of Korea explained that manufacturing inventory expanded to a high level in the second half of last year due to weak demand in upstream industries, and in response, domestic manufacturers have been adjusting production volumes, but inventory adjustment has been delayed due to sluggish shipments.

It added that the weak demand in upstream industries in the second half of last year was mainly due to major global companies increasing intermediate goods inventory in advance to prepare for supply disruptions, but economic slowdown led to reduced product demand, resulting in decreased intermediate goods orders for domestic manufacturers.

By sector, IT manufacturing inventory is expected to improve due to production cuts by global IT manufacturers and normalization of IT factory operations in China. Semiconductors are expected to see excess inventory improve in the second half of the year due to global simultaneous production cuts and increased demand for high-performance servers.

On the other hand, non-IT manufacturing inventory expanded last year mainly in petrochemicals and steel, which have high export dependence on China. If the Chinese economy recovers, inventory size may decrease, but the pace is expected to be slow.

Wholesale and retail inventory surged during the COVID-19 crisis and then showed signs of adjustment, but after social distancing measures were lifted last year, the pre-crisis increasing trend resumed. It is expected to show a moderate expansion trend this year.

Additionally, construction inventory rapidly increased since September last year due to expectations of falling housing prices and reduced subscription demand caused by rising financial costs. Considering the high persistence of construction inventory, significant improvement in the short term is unlikely.

The Bank of Korea explained, "In the case of wholesale and retail inventory, a moderate increasing trend is expected to continue due to an increase in Chinese tourists," and added, "Construction inventory is unlikely to be resolved in the short term, which may act as a factor restricting the recovery of related industries."