Government Optimistic About Domestic Demand Recovery for Half a Year... Low-Key Expression on Exports

Government Economic Trends October Issue... Similar to the Previous Month

[Image source=Yonhap News]

The government has issued an economic assessment indicating signs of domestic demand recovery for six consecutive months. The government's economic diagnosis, which emphasized the expansion of price stability and gradual signs of domestic demand recovery, was similar to last month's assessment.

On the 18th, the Ministry of Economy and Finance stated in the October issue of 'Recent Economic Trends' that "amid expanding price stability, the recovery trend centered on exports and manufacturing continues," and "there are differences in the pace across sectors amid gradual signs of domestic demand recovery centered on facility investment and the service industry."

The Ministry of Economy and Finance has used the expression "signs of domestic demand recovery" in its economic assessments for six months since May. While the government had maintained the view that domestic demand was not keeping pace with export recovery, it began to change the expression to "signs of domestic demand recovery are visible" starting in May, and added the term "gradual" from August, mindful of weak indicators such as consumption.

The assessment of prices remained the same as last month, described as "expansion of price stability." Last month, consumer prices rose by only 1.6% compared to a year earlier, marking the lowest increase in 43 months since February 2021 (1.4%). The inflation rate falling to the 1% range is the first time in 42 months since March 2021 (1.9%). Although uncertainties remain due to conflicts in the Middle East, the long-standing high inflation trend that surged to 6.3% during the COVID-19 pandemic in 2022 is considered to have stabilized.

The government cited facility investment and the service industry as grounds for optimism about domestic demand. In August, facility investment decreased by 5.4% from the previous month due to reduced investment in transportation equipment such as aircraft imports and machinery, but overall for July and August, it recorded an increase of 8.4%. The service industry grew by 0.2% in August compared to the previous month, continuing a three-month consecutive growth trend. The government views the export-driven economic recovery as following the typical recovery path leading to improved corporate performance, expanded facility investment, and increased real income. However, considering the base effect from the export improvement starting in the fourth quarter of last year, the government removed the term "steady" from the phrase "steady export and manufacturing-centered economic recovery."

However, this government assessment differs somewhat from evaluations by other institutions. The Korea Development Institute (KDI), a government-funded research institute, first used the term "domestic demand sluggishness" in December last year and has issued negative assessments throughout this year such as "delayed recovery (January)," "recovery stagnation (April)," and "weak (August)."

In the 'October Economic Trends' released on the 10th, KDI stated, "Economic improvement is constrained as domestic demand recovery is delayed, centered on construction investment." KDI pointed to sluggish construction investment as the background for the delayed domestic demand recovery. In August, construction output (constant prices) decreased by 9.0% compared to a year earlier, a larger decline than the previous month (-5.2%). KDI's diagnosis is that this is due to accumulated sluggish orders leading to reduced investment in the construction sector. Following global investment banks (IBs) such as Goldman Sachs and JP Morgan lowering their growth forecasts for the Korean economy, the OECD also lowered its growth forecast for this year by 0.1 percentage points from 2.6% to 2.5% last month.