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[Editorial] Unexpected rebound

Positive data for June can barely be taken as indicator of economic recovery

Government data released last week showed an unexpected simultaneous uptick in industrial output, private consumption and facility investment in June.

South Korea’s overall industrial production gained 4.2 percent on-month in June, rebounding from a 1.2 percent decline in May -- the first rebound in six months.

Production in the mining, manufacturing, gas and electricity sectors jumped 7.2 percent from a month earlier in June, recording the sharpest growth since February 2009, when it increased 7.3 percent.

Retail sales also rose 2.4 percent, keeping the upward trend for the third consecutive month, according to data from Statistics Korea.

Facility investment increased 5.4 percent, rebounding from a 6.6 percent contraction in May.

Government officials seem buoyed by the latest data from the statistics agency, which they see as an indication that the country’s economy may have bottomed out amid the novel coronavirus crisis.

Vice Finance Minister Kim Yong-beom said the June data showed a “clear sign of recovery,” adding there is a heightened possibility that the economy will rebound in the third quarter.

In technical terms, Asia’s fourth-largest economy slipped into a recession in the second quarter, shrinking 3.3 percent from three months earlier, following a 1.3 percent contraction in the first quarter, according to recent data from the Bank of Korea.

It is still premature to predict whether the economy will recover in the third quarter and thereafter.

The better-than-expected performance in June largely reflects a low base effect, as economic activity took the hardest hit from the coronavirus pandemic in the previous months.

The rebound in industrial output was attributed partly to a recovery in exports amid eased lockdowns in the US and other major economies. Outbound shipments from the country reached $39.2 billion in June, up from $34.9 billion a month earlier. The figure continued to rise to $42.8 billion last month, according to figures released Saturday by the Ministry of Trade, Industry and Energy.

The on-year decrease in exports also decelerated from 23.6 percent in May to 10.9 percent in June and 7 percent in July.

But the country’s outbound shipments might tumble again down the road if a resurgence in coronavirus outbreaks around the world forces governments to reimpose community lockdowns and factory shutdowns and if the tensions between the US and China continue to escalate.

Increased retail sales in June also stemmed mainly from short-term stimulus measures, such as the payment of emergency relief funds to all households and the temporary extension of a reduction in consumption taxes on car purchases.

Compared with the same period last year, June production in the manufacturing and service sectors still decreased 0.4 percent and 0.1 percent, respectively.

Particularly worrisome is that manufacturing jobs in the country decreased at the steepest pace in a decade in June. Data released last week by the Employment and Labor Ministry showed that the number of local factory workers was down 77,000, or 2.1 percent, from a year earlier to 3.65 million that month. It marked the sharpest decline since the ministry started compiling related data in 2009.

The manufacturing sector began to shed jobs in February amid the spread of the coronavirus. The number of manufacturing workers shrank by 11,000 in March, 56,000 in April and 69,000 in May.

Further weighing down on Korean companies struggling to keep afloat amid worsening business conditions is a set of regulatory restrictions that President Moon Jae-in’s administration has imposed on them since Moon took office in 2017.

Finance Minister Hong Nam-ki, who doubles as deputy prime minister for economic affairs, said last week that the government plans to allow big companies to have venture capital affiliates as it seeks to encourage them to increase investment. He expected the venture capital units to boost the “economy’s innovation and dynamics.”

But he and other economic policymakers need to be reminded that for most local firms, regulatory and labor reforms are crucial to enable them to expand investment. Complex regulations have hindered local entrepreneurs from advancing into new business areas that are set to lead the post-pandemic recovery.

Korea’s major listed firms have recently reported earnings surprises for the April-June period, with Samsung Electronics and LG Chem seeing their quarterly operating profits jumping 23 percent and 131 percent, respectively.

Accelerating deregulation would further boost that impressive corporate performance, which holds the key to pulling the economy out of its prolonged downturn.
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