Korea’s biz sentiment darkens to pandemic level, OECD outlook flags stagflation

South Korean business sentiment worsened to the pandemic year of 2020 as the latest outlook on the economy from the Organization for Economic Cooperation and Development (OECD) flagged the possibility of its first wrestle with stagflation - the dismal combination of an economy performing under its potential and prices above target level.

The Business Sentiment Index (BSI) for December was 74 down from 72 estimated last month, the Bank of Korea said Wednesday.

The index measures corporate sentiment for business conditions in the following month. A reading o below 100 means pessimists outnumbers optimists.

BSI for manufacturers fell to 69 from 73 and the index for non-manufacturing dropped to 77 from 78. The index for big businesses was unchanged at 75, while that for small- and medium-sized companies declined 7 percentage points to 62.

The survey was conducted on a total of 2,782 companies, including 1,628 manufacturers, from Nov. 8 to 15, the central bank said.

According to the Ministry of Finance and Economy, the OECD in its revised economic outlook projected the Korean economy to grow 1.8 percent next year, down from its earlier estimate of 2.2 percent. Under the estimate, the economy would be underperforming mid to long-term growth potential of around 2 percent. The last time the economy has done so poorly was in the pandemic year of 2020 with annual contraction of 0.7 percent, in 2009 amid global financial crisis with 0.8 percent growth, and in 1998 with a decline of 5.1 percent while the country was under international bailout after liquidity crisis.

Inflation was estimated at 3.9 percent for next year, unchanged from earlier projection, to hover sharply above 2 percent target.