Industrial output rises for 3rd straight year, but consumption remains weak

Despite a surge in demand for high-performance semiconductors driving South Korea’s overall industrial production to increase for the third consecutive year, the retail sector and equipment investment continue to face challenges. The strength of recovery in domestic spending is expected to play a crucial role in shaping the economic outlook for this year.

According to the ‘2023 December-Annual Industrial Activity Trends’ from Statistics Korea on Wednesday, the all-industry production index rose 0.7 percent year-on-year last year to 110.9 based on 100 in 2020. Industrial production contracted 1.2 percent in the pandemic-ridden year of 2020 but rebounded by 5.3 percent in the following year, sustaining growth for three consecutive years.

The manufacturing sector, particularly the export-driven industries, faced challenges in the first half of last year. Semiconductor production, affected by the IT industry downturn, experienced a 5.3 percent decrease, marking the first negative growth since 2001. Manufacturing output saw a 3.9 percent decline, the largest since the 1998 financial crisis.

However, the recovery trend became evident towards the end of the year. Manufacturing output, which had averaged a 6.6 percent decline in the first three quarters, rebounded in the fourth quarter, posting a 4.4 percent increase, led by the recovery in semiconductor and automobile exports. Semiconductor production in December alone increased by 8.5 percent, marking the second consecutive monthly increase, while inventories declined for the fourth consecutive month.

Overall, the momentum of economic recovery appears to be continuing, as reflected in the cyclical component of leading index, which increased for the fourth consecutive month in December, buoyed by the effect of decreasing inventories.

However, domestic challenges persist, with retail sales falling 1.4 percent in 2023, marking the largest contraction in 20 years due to the impact of high-interest rates and inflation shocks.

Equipment investment also saw a significant decline of 5.5 percent, the most substantial drop in four years.

According to the Bank of Korea, private sector consumption is expected to see a modest recovery of 1.9 percent this year, while equipment investment is forecasted to increase by 4.1 percent. However, construction investment is predicted to decline by 1.8 percent, indicating ongoing challenges in the sector.