KDI "Rising Downside Risks to Economy Due to Worsening External Conditions"

KDI Releases February Economic Trends Report
Continued Concerns Over the Economy Following Last Month
Sluggish Domestic Demand Adds to Export Worries
Facility Investment Shows Signs of Recovery

On the 10th, the Korea Development Institute (KDI), a government-funded research institute, diagnosed that the downside risk to the economy has increased due to recent political instability and worsening external conditions. This follows their mention of 'downside risk to the economy' in last month's economic trends report, with the same concern expressed again this month.

Export and import cargo piled up at Busan Port Sinsundae Pier. Photo by Yonhap News

In the February economic trends report released that day, KDI evaluated, "Recently, our economy's production growth has remained at a moderate level," and "the downside risk to the economy is increasing due to deteriorating external conditions."

KDI noted, "Manufacturing, centered on semiconductors and automobiles, has improved, but production showed only a moderate increase due to sluggishness in the construction industry," and added, "Domestic demand recovery is delayed, mainly in consumption and construction investment, and the previously high export growth rate has gradually slowed, especially in sectors other than semiconductors."

They also explained, "Amid ongoing political instability and expanding external uncertainties, the downside risk to the economy has increased," and "Concerns about the worsening trade environment have expanded as trade disputes have intensified, particularly centered on the United States."

Earlier, in last month's economic trends, KDI mentioned, "As production growth slowed and economic improvement was delayed, downside risk to the economy increased due to economic sentiment contraction caused by expanding uncertainties." Although financial market fluctuations were limited, "household and corporate sentiment indices fell sharply," according to KDI's assessment.

In the production sector, the impact of the construction downturn is growing. In December last year, total industrial production increased by only 1.4% year-on-year, despite longer working days and improvements in the mining and manufacturing sectors, due to sluggishness in construction. Domestic demand was also weak, centered on construction investment. To make matters worse, internal and external uncertainties have expanded, tightening the pressure on our economy.

KDI explained, "Household and corporate sentiment indices, which plunged sharply in December due to political instability, remained at low levels in January," and "As export growth slowed in items other than semiconductors and trade disputes intensified mainly in the United States, concerns about the worsening trade environment expanded."

With the high-interest-rate stance maintained, consumption is also showing a sluggish trend due to household sentiment contraction caused by political instability. Retail sales in December last year decreased by 3.3% year-on-year, mainly in passenger cars, home appliances, clothing, and vehicle fuel. Service consumption also saw an expanding decline in major sectors.

In December last year, facility investment increased by 13.1% year-on-year, continuing its recovery trend, as semiconductor-related investments showed a favorable flow. KDI's assessment was that "leading indicators also suggested a continued improvement trend in semiconductor-related facility investment."

However, construction investment, another pillar of investment, remains sluggish. In December last year, construction performance showed negative trends in both the building and civil engineering sectors, decreasing by 8.3% year-on-year. KDI noted, "Although the housing market shows signs of slowing down recently, leading indicators such as construction orders have maintained an improving trend."

Exports showed a sluggish increase centered on other items despite strong export performance in information and communication technology (ICT) products. The export environment has deteriorated as international trade disputes have intensified, mainly in the United States. The employment market is gradually slowing its growth due to the continued impact of weak domestic demand.

KDI evaluated, "Consumer price inflation has somewhat expanded due to highly volatile factors such as exchange rates and oil prices," but also noted, "Weak domestic demand is acting as a downward pressure on prices." Regarding the financial market, they stated, "Although the impact of domestic uncertainties has diminished, external uncertainties persist, keeping volatility at a high level."

Regarding the global economy, KDI continued to express concerns. They pointed out, "Major institutions forecast that the global economy will maintain moderate growth this year, but have raised the possibility that the worsening global trade environment could act as a downside pressure on the economy."

They also explained, "Although concerns about overinvestment by U.S. artificial intelligence (AI) companies temporarily increased financial market volatility, the dollar index and long-term interest rates declined since mid-last month due to slowing inflation and the possibility of trade negotiations."