Investment in facilities, which is cited as a driver of economic recovery, recorded its largest decline in 4 years and 3 months, raising concerns that the South Korean economy may have entered a period of significant recession this year. In particular, as the relentless ‘construction cold wave’ drags down production across all sectors and consumer demand shows weak trends, these observations gain further credence.
◇Investment in facilities down 14.2% from the previous month… largest decline in 4 years and 3 months
According to the 'January 2025 industrial activity trend' report released by the Statistics Korea on the 4th, the investment index for facilities in January (seasonally adjusted) stood at 102.7, a decrease of 14.2% compared to December of last year. This marks the largest decline since October 2020 (-16.7%). The decline was influenced by decreases in investments in machinery such as equipment for semiconductor manufacturing (-12.6%) and other transport equipment (-17.5%).
Investment in facilities refers to the funds that corporations use to invest in equipment or facilities for production, serving as a key indicator of economic trends. It generally means the expense incurred in purchasing assets that are used repeatedly in the production process for over a year. Corporations typically increase their investment in facilities when they anticipate future demand growth, while they tend to reduce investments when economic uncertainty rises.
The decline in the investment index for facilities suggests that corporate investment sentiment has weakened, which can be interpreted as a precursor to economic recession. Notably, January saw the inauguration of the U.S. Trump administration's second term, which marked the full-scale onset of a tariff war. The political uncertainty following last December's emergency martial law also appears to have contributed to the slowdown in investment in facilities.
Ju Won, head of the economic research office at the Hyundai Economic Research Institute, expressed concern, saying, "Investment in the information technology (IT) sector, which drives investment in facilities, is in an unstable situation," and noted, "The economic outlook also seems uncertain.
However, the government maintains that it is too early to predict an economic recession. Lee Doo Won, a statistical review officer at Statistics Korea, explained, "When looking at the annual data, investment in facilities increased by 3% last year, and in December alone, it rose by 7.5%. Therefore, the increased decline may be due to a base effect, so we need to monitor the trend." He added, "Since the domestic machinery orders, which are leading indicators for investment in facilities, increased by 38.1% year-on-year in January, there is also a possibility that investments in facilities may rise again afterward."
A Ministry of Strategy and Finance official stated, "The tariff issue was raised last year as well, but I cannot explain why investment in facilities increased in December," and added, "I don’t think the decrease in January can be seen as influenced by the U.S."
◇Construction industry's recession impacts economy overall… construction performance at its lowest since November 2015
However, the concerns regarding economic recession are not solely due to the decline in investment in facilities. The prolonged recession in the construction industry is having a negative impact on the overall economy.
The construction performance index, which indicates construction achievements (constant and seasonally adjusted), stood at 9.823 trillion won, a decrease of 4.3% compared to December of last year. In all sectors, including architecture (-4.1%) and civil engineering (-5.2%), construction performance has declined, marking the greatest decrease in 10 months since March last year (9.4%). The index has continued to show a decline for six consecutive months, with decreases recorded in August (-2.1%), September (-2.0%), October (-0.5%), November (-3.1%), and December (-1.9%). Compared to the same month last year, the index decreased by 27.3%, showing the largest decline in nearly 26 years. This is the first time the construction performance index has fallen below 10 trillion won since November 2015 (9.738 trillion won).
A Ministry of Strategy and Finance official explained, "The drop in the indices for production in manufacturing and services in January seems to be a 'correction' considering the increase in December last year, but the construction sector has seen a continuous decline for six months, with the magnitude of the losses worsening," adding, "The construction industry has had a significant impact on the overall economy."
While overall production increased by 1.7% in December last year, it has reverted to a decrease of 2.7% after just one month. Moreover, retail sales have also turned to a decline (-0.6%) this year, resulting in a 'triple decrease' where production, investment, and consumption have all declined simultaneously for the first time in three months since October last year.
Furthermore, the coincident composite index, which reflects the current economic situation, recorded a drop of 0.4 points to 98.4 in January, showing a declining trend for three consecutive months. The leading composite index, which forecasts future economic conditions (100.4, down 0.3 points), has also fallen for two consecutive months.
Ju Won expressed concern, stating, "Although there may be base effects in January regarding exports and other indicators, even considering that, the magnitude of the decline in (key indicators) is still too large," and pointed out, "If the government’s explanations hold true, consumption should have improved." He continued, "Given that the coincident index and others have fallen, this situation could be interpreted as an already commenced economic recession."