As the construction and automotive sectors continue to suffer, the impact of tariffs in the United States is becoming more pronounced. Production and investment in May have seen consecutive declines, following a drop last month, and consumption has also failed to rebound. Amidst a pause in the economic recovery, attention is focused on whether the supplementary budget, sized at 30 trillion won, can serve as a catalyst for economic improvement in the second half of the year.

On the 13th of June, export vehicles are lined up at the Pyeongtaek Port automotive terminal in Pyeongtaek City. /Courtesy of News1

◇ Overall production declines for the second consecutive month, affected by 'poor performance in upstream industries'

According to the '2025 May Industrial Activity Trends' released by the Statistics Korea on the 30th, the overall corporate production index last month was 112.5 (2020=100), marking a 1.1% decline compared to the previous month. This marks two consecutive months of decline following a 0.8% drop in April. Only the public administration sector (0.8%) saw an increase in production, while construction (-3.9%), mining and manufacturing (-2.9%), and services (-0.1%) all experienced decreases.

The decline in manufacturing has been particularly notable. Manufacturing production decreased by 3.0% compared to the previous month, marking the largest drop in four months since a 3.1% decrease in January. Specifically, significant reductions were observed in pharmaceuticals (-10.4%) and metal processing (-6.9%). Pharmaceutical production was impacted by corporations expanding the proportion of lower-cost products, while the decline in metal processing production was confirmed to be due to reduced demand in the construction and automotive industries.

Choi Chang-yoon, Director of the Statistics Korea's Service Industry Trends Division, noted, 'Production in metal processing significantly decreased due to reduced demand for automotive press products and terrestrial metal structures.' He explained, 'In particular, both production and exports of automotive components were impacted by the tariffs implemented last month in the U.S.'

However, the government's interpretation is somewhat different. They believe that the impact of poor domestic demand is greater than that of tariffs on the overall automotive industry. Cho Sung-joong, Director of the Ministry of Economy and Finance's Economic Analysis Division, said, 'Korea's automobile exports to the U.S. declined in April and May, but this is due to the start of operations at a local factory in Georgia in January.' He added, 'As Hyundai and Kia's market share in the U.S. is increasing, the decline in exports should be seen more as an adjustment in local procurement volumes rather than the impact of tariffs.'

Choi Chang-yoon, the head of the Service Industry Trends at the Statistics Korea, is announcing the industrial activity trends for May 2025 at the Government Sejong Building in Sejong City on the 30th. /Courtesy of News1

◇ Investment and consumption are also sluggish... a setback for economic recovery signals

The trend of economic downturn did not stop at production. First, facility investment decreased by 4.7%, marking three consecutive months of decline for the first time in two years, following drops of 0.5% in both March and April. While there was an increase in investment in transport equipment (0.1%) such as other transport equipment, the machinery sector (-6.9%), including semiconductor manufacturing machinery, dragged the overall trend down.

Construction activity declined by 3.9%, with both construction performances in buildings (-4.6%) and civil engineering (-2.0%) all resulting in decreases, while new construction orders fell 5.5% compared to the same month last year.

Consumption failed to rebound. Sales of durable goods (1.2%) such as communication devices and computers, and semi-durable goods (0.7%) such as clothing, increased. However, sales of non-durable goods (-0.7%) such as cosmetics decreased, leading to stagnation.

As a result, there seems to be a setback in expectations for economic recovery. The coincident composite index's cyclical fluctuation decreased by 0.4 points compared to the previous month, while the leading composite index's cyclical fluctuation also decreased by 0.1 points.

Director Choi stated, 'The coincident composite index's cyclical fluctuation had been increasing for three consecutive months but turned to a decrease in May.' He added, 'There had been signs of some economic recovery recently, but due to uncertainties both domestically and internationally, we need to monitor the long-term trend.'

◇ Government expects “effect of supplementary budget”... experts differ in outlook

The government anticipates that once the 30.5 trillion won supplementary budget, which is pending approval from the National Assembly, begins to be implemented, related indicators will improve. Director Cho noted, 'Direct and immediate projects such as consumption coupons for recovery of livelihoods are expected to help improve consumer sentiment once the supplementary budget is executed.'

However, there are differing opinions among experts regarding its effectiveness. Joo Won, Director of the Economic Research Division at Hyundai Research Institute, explained, 'If the economic downturn continues until the supplementary budget begins to be executed, there is a possibility that a recovery trend will follow.'

On the other hand, Woo Seok-jin, a professor of economics at Myongji University, stated, 'Last year, Korea's Gross Domestic Product (GDP) was about 2500 trillion won, while around 13 trillion won was allocated for the consumption coupons for recovery of livelihoods. While this may help self-employed individuals’ sales locally, it is difficult to believe that there will be a significant improvement in economic indicators.'

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