The South Korean economy has been mired in an economic slump for the seventh month, but has not worsened, state think tank Korea Development Institute (KDI) judged to indicate Asia’s fourth largest economy entering a L-shaped recession or stagnation.

In its October monthly economic report released Thursday, state-run think tank KDI observed that “the Korean economy remained stagnant” amid weak exports despite increased consumption. The latest report is based on August industrial and employment figures and September trade and inflation figures, which have been mixed positive and negative.

The labor market improved significantly in August, with an addition of 452,000 jobs that has led the country’s employment rate to hit its highest in 22 years. Industrial figures such as of production, consumption, and investment also climbed for the first time in five months in August.

Korea’s consumer prices, however, fell 0.4 percent in September, the first on-year drop since Statistics Korea began compiling related data in 1965, raising worries about deflation. Exports also fell 11.7 percent on year in September mainly due to sluggish demand for semiconductors and petroleum products.

The KDI said that sluggish consumption improved with widened increase in retail sales and production in service industry in August but the economy remains stagnant, particularly in sectors such as mining and manufacturing and construction industries, amid continued weak exports and investment.

KDI, however, added that the slowing economy has not worsened given that inventory rate in manufacturing sector and cyclical component of coincident index remain unchanged without big fluctuation.

Inventory-to-sales ratio in the manufacturing sector stood high at 112.4 percent in August – but slightly lower than 115.6 percent in the previous month. The cyclical component of component coincident index, which reflects current economic situation, increased 0.2 points in August from a month earlier.

With regard to concerns about deflation, KDI said the drop in consumer prices in September “is a temporary phenomenon” due to widening fall in the prices of agricultural products and public services and that it would be difficult to interpret it as deepening sluggish demand.

Since April, KDI has analyzed the Korean economy as being mired in a “slump” for a seventh month until October. The think tank, however, judged the slump has not worsened this time. Although the economy on a downswing isn’t picking up, it hasn’t worsened either.

Kim Seong-tae, head of economic outlook at KDI, said that the economy has not worsened and isn’t going downwards but rather towards a L shape.

“It is difficult to say [the economy] has improved but since it has fallen to as low as it can it will not worsen until there is a big event,” he said.

Analysts are worried that the Korean economy may have entered long-term L-shape recession, a lengthy stagnation after a deep dip that makes faster recovery difficult.

Kim Jung-sik, economics professor at Yonsei University, said exports will continue to remain weak due to external conditions, making it difficult for the Korean economy to recover even next year. He urged the government to introduce fiscal policies so that the economy does not worsen and make sure funds do not go to waste and be invested where needed.

Some experts, meanwhile, also raise hopes for an economic rebound after testing the bottom.

According to Statistics Korea, the economy has contracted for a 24th month since its peak in September, 2017. Its previous contraction lasted for 19 months.

By Kim Yeon-joo and Lee Eun-joo

[ⓒ Pulse by Maeil Business Newspaper & mk.co.kr, All rights reserved]