For some firms, South Korea's economy feels like it's already in recession

Amorepacific

02/07/2019 08:00

* Trade war, rising labour costs hurt South Korean economy
    * Government to downgrade economic forecasts this week
    * Bank of Korea set to cut rates soon
    * Inventories highest since late 1990s Asian crisis
    * Exports shrink, private sector bleeding jobs

    By Joori Roh
    SEOUL, July 2 (Reuters) - Kang Dong-wan, the head of an
electronic goods supplier for South Korea's biggest global
brands, says it feels like Asia's fourth-largest economy is in a
recession as business conditions have deteriorated further after
a tough 2018. 
    A trade war between China and the United States has slowed
sales abroad, domestic demand remains sluggish, and operating
costs have risen along with a cap on weekly working hours and a
29% increase in minimum wages in the past two years.
 urn:newsml:reuters.com:*:nL3N20761P
    For Kang's company, Alps Electric Korea Co Ltd, which
supplies components to big firms such as Hyundai Motor Co
 005380.KS , Samsung Electronics Co Ltd  005930.KS  and LG
Electronics Inc  066570.KS , this meant a 40% drop in sales
year-on-year to 600 billion won ($515.95 million) in 2018.
    The three big firms, whose combined revenue is equivalent to
more than a fifth of South Korea's annual economic output of
$1.5 trillion, saw their profits tumble last year and had to cut
orders placed on thousands of suppliers across the country.
    Kang's own suppliers are struggling. Some went bankrupt.
Kang let go of 15% of the staff last year and says that if the
external environment continues to deteriorate another 30% could
be at risk. 
    "The current economy seems worse than it was back in 2008,
during the global financial crisis," Kang said in his office in
Hanam Industrial Complex in the city of Gwangju, some 270 km
(167.77 miles) southwest of Seoul.
    "The worst scenario for us will be our unit only doing
design work and our production being tossed to countries with
cheaper labour such as China or Mexico."     
    The consensus view of economists is that South Korea will
avoid an outright recession - two consecutive quarters of
negative growth - thanks to the government's active
implementation of budgeted spending plans for the year, though
the risk of a slump keeps growing with each passing month. South
Korea last slipped into a recession in 2009.  urn:newsml:reuters.com:*:nL3N22608C
    While the economy shrank 0.4% in the first quarter, its
worst performance in a decade, the government is betting on
higher fiscal spending to support a modest rebound in growth in
the second quarter. 
    That will be little comfort to businesses which are yet to
see any notable improvement in demand at home and overseas. 
    In fact, trading conditions appear to have deteriorated over
recent quarters and have raised expectations that the Bank of
Korea, which hiked interest rates in November, will likely cut
them back as early as this month to boost domestic demand. 
    Later this week, South Korea's finance ministry is widely
expected to downgrade this year's economic growth target,
currently at 2.6%-2.7% and nearly a full percentage point above
analysts' consensus.
   
    
    SPREADING GLOOM
    A scan of stock exchange filings shows many firms are in the
same boat as Alps Electric Korea. Operating profits for Yest Co
Ltd  122640.KQ , a semiconductor equipments manufacturer,  fell
98.2% year-on-year in the first quarter. 
    Tonymoly Co Ltd  214420.KS , a South Korean cosmetic brand
popular among Chinese customers, reported a 3.7 times larger
operating losses in the first quarter, while operating profit of
its peer Amorepacific Corp  090430.KS  slid 20.9%.
     "Hope.. it's hard to have hopes. Right now it's hard to
find any clear positives for the economy," said Kang Hyun-ju, a
research fellow at Korea Capital Market Institute. 
    Both leading and lagging economic indicators suggest there
will be no let-up in pressure for South Korea Inc. in the short
term, as the Sino-U.S. trade war upends global supply chains and
hurts demand. The won currency  KRW= , seen as a proxy for
global trade activity, slumped to near two-year lows in May.
 urn:newsml:reuters.com:*:nL4N23E0E7
     Depressed global demand has hit South Korea's manufacturers
particularly hard.
    The nation's exports plunged in June for their seventh
consecutive month of contracting sales, while shipments to China
were down nearly a quarter from last year - the worst in a
decade. A business survey on Monday showed factory activity
shrank the most in four months in June as the global trade
slowdown deepened, prompting companies to cut back production
and shed more jobs.
 urn:newsml:reuters.com:*:nS6N22W05D urn:newsml:reuters.com:*:nS7N1PQ006 urn:newsml:reuters.com:*:nL4N23703S urn:newsml:reuters.com:*:nL4N23Y0D8
    The Korea Auto Industries Coop. Association says some
primary suppliers have gone bankrupt. 
    A slight improvement in the job market this year after
unemployment hit nine-year highs in January is being driven by
state hiring, with the manufacturing and construction sectors
bleeding jobs every month.  urn:newsml:reuters.com:*:nS6N22I00F
    Even if fortunes turn around globally, it will take time for
South Korea to recover, as a large inventory build-up in recent
quarters will need to be cleared before production ramps up.
    Its inventory-to-shipments ratio hit 118.5% in May, the
highest since September 1998 when the economy was in the throes
of the Asian financial crisis.
    "We can't even guess the outlook for the second half," said
Ahn Ki-hwaun, vice president at Korea Semiconductor Industry
Association, lamenting a "lack of demand."
($1 = 1,162.9000 won)
   


    <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
S.Korea's inventory-to-shipments ratio since 1998 png    https://tmsnrt.rs/2YlK9yW
S.Korea's inventory-to-shipments ratio since 1998 interactive   
https://tmsnrt.rs/2Yics1d
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 (Reporting by Joori Roh; Editing by Marius Zaharia, Choonsik
Yoo & Shri Navaratnam)
 ((joori.roh@thomsonreuters.com; +82 2 3704 5642; Reuters
Messaging: joori.roh.thomsonreuters.com@reuters.net))