Seoul, South Korea – South Korea's domestic sales index, a key indicator of domestic consumption, has been on a downward trajectory for the past 15 months, signaling a significant slowdown in the nation's economy. This decline reflects a weakened consumer sentiment amid growing economic uncertainties.
According to an analysis by Kyunghyang Shinmun of data from the Korea National Statistical Office, the seasonally adjusted domestic sales index stood at 94.6 in the third quarter of this year (2020=100), marking a 1.3% decrease from the previous quarter. This marks a five-quarter streak of declines or stagnation, the longest such period since 2014-2015.
The domestic sales index tracks the sales of goods and services produced domestically to domestic companies, institutions, and individuals. A decline in this index indicates a weakening economy and a decrease in consumer demand. Consequently, businesses are forced to tighten their belts, reducing production and cutting costs.
With October's data showing a further 0.7% decline, the index is expected to continue falling in the fourth quarter. Moreover, the index has remained below 100 since the fourth quarter of 2022, indicating that domestic sales have consistently underperformed compared to the benchmark year of 2020.
The manufacturing sector, which has been a mainstay of the South Korean economy, has seen its domestic sales index remain below 100 for the past ten quarters. This persistent decline has raised alarm bells about the health of the manufacturing industry.
Furthermore, the increasing reliance on foreign-made intermediate goods in the manufacturing process is a cause for concern. While the supply index for domestically produced intermediate goods decreased by 4.3% in the third quarter compared to the same period last year, the supply index for foreign-made intermediate goods increased by 1.3%. This suggests a shrinking domestic market for local suppliers.
The outlook for exports, which have been a growth engine for the South Korean economy, is also clouded by the anticipated return of protectionist policies under a potential Trump administration in the United States.
Economic forecasters have expressed concerns that it will be challenging to achieve the projected potential growth rate of 2.0%. The Bank of Korea has forecast a growth rate of 1.9% for next year.
Since 2000, South Korea's economic growth has been steadily slowing down. While the economy grew by an average of 5.02% annually between 2001 and 2005, this figure declined to 4.36% between 2006 and 2010. The growth momentum further weakened in the 2010s, with average annual growth rates of 3.12% (2011-2015) and 2.28% (2016-2020), respectively.
Experts emphasize the need for policies that foster innovation to boost the economy's underlying potential.
"The traditional export-led growth model, heavily reliant on a few large conglomerates, has reached its limits," said Han Yang University professor Ha Joon-kyung. "We need to create an environment that encourages the emergence of new businesses and industries by reducing barriers to entry and reforming the capital market."
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