Domestic Demand Continues to Hit New Bottom

“I come to my office everyday to work, but the truth is, there is no work to do,” says Kim Pan-ki, a 55 year-old shoe wholesaler who runs a company at Jongno, Seoul. All he does these days is sighing at the plunging sales record.

He has run the company for 30 years, but he complains that things could not get any tougher than now. Until late last year, his customers were mainly shoe retailers in the Chunggyecheon shopping arcade. Due to low demand caused by economic slowdown, however, he now supplies shoes to discount stores. Yet, things are not getting any better.

“This is worse than during the financial crisis. Just one or two years ago, shoe wholesalers made three million won a day, but now, we barely make 500,000-700,000 won. Even that little sum is usually on credit so I often don’t receive money on time. I honestly don’t know whether I can maintain my business any longer.”

It seems that Kim’s struggle will continue for the time being. “Industrial Activities Trend in July 2004,” released by the National Statistical Office on August 27, shows that consumption and investment are once again being contracted after a short recovery in June.

As a result, the government’s “hopeful prospect,” that domestic demand will begin recovery at full pace and offset the slowdown of exports in the second half of this year, is losing its ground.

Private sector experts even raised concerns over whether the Korean economy, which maintained export-backed growth, is now truly going downwards.

Domestic Demand Continues to Hit New Bottom –

Consumption and facilities investment seem unlikely to recover. The sales record of wholesalers and retailers, the major consumption indicator, increased only by a year-on-year 0.2 percent in July. Although sales of discount stores grew for three consecutive months, recording 8.1 percent in July, sales of department stores continued to show negative growth, contracting six percent in July.

Commodities shipping for domestic consumption also declined by 4.1 percent. The sizzling summer did not boost sales as much as expected, disappointing the businesses. Facilities investment growth dropped significantly from the previous month’s 7.7 percent to 2.5 percent.

Industry production grew 12.8 percent, recording two-digit growth for six months in a row while shipping also increased 11.8 percent.

However, the growth in production was a “technical rebound” after the production slowdown caused by labor disputes in the automotive industry. Shipping is also at a stalemate as it increased only by 0.4 percent compared with the previous month.

The most noticeable figure is facilities operation rate of the manufacturing industry, which fell by 0.4 percentage point from the previous month to 79.4 percent. This is the lowest in 10 months since September 2003 after falling for three consecutive months.

Is the Korean Economy Going Downwards?—

The government still maintains its position that domestic demand is recovering though it may be weak. Deputy Prime Minister and Minister of Finance and Economy Lee Hun-jai said the economy is certainly recovering although it might take some time for the recovery to become visible.

However, experts in the private sector think otherwise. They worry that the Korean economy is showing signs of a downswing.

“We had too much hopes for the recovery of domestic consumption. The gap between domestic consumption and exports is not narrowing, which clearly testifies that the economy in heading downwards since the fourth quarter (October to December) of last year,” says Oh Sang-hoon, chief of Investment and Strategy Team at SK Securities.

In its recent report on the Korean economy, Morgan Stanley pointed out, “The Korean economy is going downwards after passing the peak on the business cycle because of unfavorable external conditions such as an economic cool-down in China, slowdown in IT exports, and high oil prices.”

Experts argue that the government must use various economic stimulus packages to stop the economy from falling any further.

Chi-Young Shin Ji-Wan Cha higgledy@donga.com cha@donga.com