The latest key business cycle indicators for the Republic of Korea appear to be foreshadowing an impending economic decline for the Asian country noted for its electronics exports.
South Korea’s Gross Domestic Product (GDP) on a Purchasing Power Parity (PPP) basis did expand in October 2019 increasing at a respectable annual rate of 3.8%. Still, South Korea’s economy is underperforming compared to the world average improvement of 4.7% at October 2019 from one year earlier.
Considering prior economic history, business cycle slowdowns typically happen within roughly 8 to 16 months from a peak in a country’s GDP.
GDP tracks a long-term growth trend via business cycles of growth or recession that repeat approximately every 5 years or so, albeit that no two business cycles mirror the same duration or size. America’s National Bureau of Economic Research states that there were 33 business cycles from 1854 to 2009.
Also, cyclical indicators are erratic with multiple major influences. Even more confusing is the fact that no consensus exists for which indicators universally trigger business cycles in all cases.
To impose some structure on this chaos, The Economist organizes its benchmarks into 3 critical categories: leading indicators that turn in advance of a cycle change; coincident indicators that define when the overall business cycle turns; and lagging indicators that top out following a business cycle.
South Korea’s Leading Business Cycle Indicators
South Korea’s central bank authorities cut the country’s prime lending rate by half a percentage point to 1.25% in December 2019.
Four of the other selected 5 leading indicators below deteriorated over the 12 months representing the latest reporting period. Building permits in South Korea slumped by about 16% while retail sales fell almost 3%. Business confidence slowed slightly year over year as did national sales of Korean-made cars.
Nevertheless, consumer confidence posted modest improvement.
The Economist estimates that an economy hits its highest level about 8 to 16 months after business and consumer confidence starts to drop. There are shorter timeframes in advance of an economy’s GDP peak for slowdowns in car sales (6 months) and building permits (2 to 3 months).
- Interest rates: 1.25% at Dec. 2019 (-0.5% lower than 1 year earlier)
- Business confidence: 98.36271 points at Nov. 2019 (down -0.1% from 98.45911)
- Building permits: 5,924 at Nov. 2019 (down -16.5% from 6,900)
- Consumer confidence: 99.89895 at Nov. 2019 (up 0.63% from 99.27116)
- Retail sales: Up 2.11% at Oct. 2019 (reversing down -2.98%)
- Domestic-make car sales: 1,533,166 vehicles for all 2019 (down -0.8% from 1,545,604 in 2018)
Business confidence is an indicator based on opinion surveys revealing how pessimistically or optimistically business managers perceive their companies’ future potential and therefore can anticipate turning points in economic activity. In contrast, consumer confidence measures public opinions on standardized questions about household finances, a country’s economy in general as well as plans for major purchases on durable products lasting over a year or buying a home or an automobile.
Building permits mean official authorizations required before new building construction can proceed. Building permits are a leading macroeconomic indicator for both country and global business cycles. Typically, construction work starts immediately after a building permit is granted.
Retail sales refers to an aggregate measure of the percentage change in the retail sales index against the same month in the prior year. It measures consumer demand for finished goods and is considered a major macroeconomic indicator of whether an economy is moving towards contraction or expansion. Retail sales focus on volume changes only and exclude price level movements.
A country’s domestic-make car sales metric specifies the number of new passenger cars sold irrespective of price.
South Korea’s Coincident Business Cycle Indicators
Percent changes in Gross Domestic Product (GDP) on a Purchasing Power Parity (PPP) basis are much-scrutinized headline numbers that define whether an economy is contracting or expanding. That’s because year-over-year GDP changes coincide with and thus signal the start of a recession or boom period.
The latest GDP on a PPP basis statistics reveal that the South Korea’s economic growth is modest.
- GDP: US$2.320 trillion at Oct. 2019 (up 3.8% from $2.235 trillion)
- GDP per capita: $44,740 at Oct. 2019 (up 3.4% from $43,290)
Please note that South Korea is the world’s 14th biggest economy. Its share of the world’s overall GDP of $141.860 trillion was 1.6% at October 2019, down from 1.7% one year earlier.
In addition, South Korea’s GDP per capita income of $44,740 is almost 2.5 times greater than the global average GDP per person of $18,391 as of October 2019.
South Korea’s Lagging Business Cycle Indicators
South Korea’s critical capital investment to GDP ratio increased by a paltry 0.1% from 2018 to 2019. Other key lagging indicators remain at healthy levels, yet the critical unemployment rate shows traces of slippage. The annual inflation rate in South Korea improved from 1.476% to 0.461% in 2019, while South Korea’s jobless rate accelerated by 0.2%.
Usually capital investment shadows GDP peaks and valleys via a 12-month delay. Both inflation and unemployment accelerate about 6 months after GDP reaches its maximum growth.
- Capital investment to GDP ratio: 31.405% in 2019 (up 0.095% from 31.31%)
- Unemployment rate: 4% in 2019 (up 0.158% from 3.842%)
- Inflation rate: 0.461% in 2019 (reversing from 16.332%)
The ratio of capital investment to GDP is a lagging but future planning-oriented indicator. It records the value that a country spends on capital development and infrastructure projects divided by its overall GDP output on a PPP basis.
Unemployment rate is a percentage based on a country’s total labor force, not its full population. It is a critical metric since many mortgage holders experience severe difficulties paying their debt obligations once they become jobless.
Inflation rate documents the percentage change in average consumer prices in a country over a one-year period, and measures cost-of-living.
Research Reference Materials:
Forbes, Recession Is Overdue By 4.5 Years, Here’s How To Prepare. Accessed on January 14, 2020
MarkLines Automotive Industry Portal, South Korea Flash report, sales volume, 2019. Accessed on January 14, 2020
National Bureau of Economic Research, US Business Cycle Expansions and Contractions. Accessed on January 14, 2020
The Economist, Guide to Economic Indicators: Making Sense of Economics (7th Edition). Accessed on January 14, 2020
Trading Economics, South Korea Chartered Banks Prime Lending Rate. Accessed on January 14, 2020
Wikipedia, Consumer confidence index. Accessed on January 14, 2020