Semiconductor Boom Creates an Illusion... Benefits Not Reaching Households or Businesses [Weekend Money]

Coincident and leading indicators diverge
A boom that looks good only in the data: uneven benefits
Rising expectations and the burden of high interest rates

An analysis has found that South Korea's economy has entered the latter stage of an expansion, but the warmth generated by exports and semiconductors has failed to spread to household income or overall corporate profits, while the burden of high interest rates continues to accumulate.

According to IBK Investment & Securities, financial markets have recently focused on rising interest rates in South Korea and the United States, leaving real-economy indicators released at the end of last month and the beginning of this month overlooked. However, key indicators show that the fallout from high interest rates is more severe than expected and that the burden is affecting each economic sector unevenly.

The most notable development in the economic indicators is that the coincident and leading indicators have begun to move in opposite directions. The coincident index, driven by exports, continues to rise strongly, while the leading index, based on key financial market price variables and sentiment indicators, has reversed course and is declining. The economy remains in an expansion phase, but expectations for the future are falling and unease is growing. This is a typical pattern in the latter stage of an economic expansion.

The decline in the leading index was largely driven by the sharp drop in stock prices since mid-June. It also reflects how accumulating negative news is dampening market expectations and fueling anxiety, as seen in the news sentiment index, which has continued to fall recently. In particular, the decline in the news sentiment index is becoming entrenched as a trend. The recent downturn in sentiment indicators and the cyclical component of the leading index is likely to be a trend rather than a temporary phenomenon, the analysis said.

The lack of a broad-based economic recovery and differences across sectors were also cited as major risks. The report noted that, although the economic cycle has already entered its latter stage, the benefits of the expansion have not spread across the board. The production diffusion index, which shows whether the benefits of an economic recovery are spreading, recently reversed course and declined in mining and manufacturing, while services have continued to trend downward.

In particular, the boom led by semiconductors has not translated into higher household income or corporate profits. Expectations for consumption have risen, buoyed by economic growth and gains in stock indexes, but this has not translated into actual consumption. That is because the benefits of the boom have not led to an improvement in households' actual spending power through higher wages or employment.

The gap between businesses' perceptions of economic conditions and their actual earnings environment is also significant. The report said that corporate profitability remains below its long-term average, despite expectations for the overall economy and business conditions. In particular, the gap has widened considerably between the operating profit growth rate of listed companies and indicators reflecting actual economic conditions. The overall corporate earnings environment remains sluggish, while large profits at some semiconductor companies, driven by strong overseas demand, have made the headline operating profit growth rate appear much higher than it actually is.

Jung Yongtaek, a researcher at IBK Investment & Securities, said, "If income or profits fail to keep pace with rising expectations for demand, people may ultimately have to borrow to meet that demand. The current high interest rates are preventing this from happening. Expectations are rising, but the conditions needed to meet them are not easily taking shape, which means those expectations may not last long." He added, "Indicators of corporate demand for capital investment are rising sharply, but stagnant funding conditions and profitability suggest that demand for and the need to borrow have grown just as much. They also show that the burden of high interest rates is inevitably substantial."

This content was produced with the assistance of AI translation services.