Haver Analytics
Haver Analytics

Economy in Brief

This week we focus on South Korea, where ongoing political uncertainty continues to weigh on the economy. The Korean won remains under pressure, and equities are struggling to mount a meaningful recovery (Chart 1). The political instability has also dampened both consumer and business sentiment (Chart 2), posing a risk to economic activity if the situation persists or worsens. Focusing on the manufacturing sector, recent PMI readings indicate that the economy has struggled to maintain expansion, suggesting that factors beyond political instability, including external pressures, have been contributing to the challenges (Chart 3). Despite these headwinds, the Bank of Korea (BoK) opted to hold interest rates steady last week, pausing its easing cycle for now, despite the aforementioned economic constraints (Chart 4). A closer look reveals both domestic and external factors likely influenced the BoK’s decision. Domestically, the interim political flux has certainly played a role. Externally, considerations include more muted market expectations of Fed rate cuts this year (Chart 5) and potential trade-related actions from the newly re-elected Trump administration (Chart 6).

Impacts of recent political developments Political uncertainty continues to weigh heavily on South Korean financial markets, with the won remaining on the back foot after being the worst-performing Asian currency last year. The South Korean won has weakened significantly in recent months, particularly against the US dollar (Chart 1), depreciating by around 11% since early October. While the broader impact of a strengthening dollar has contributed to this decline, the won has been especially impacted by domestic political turmoil, notably following President Yoon's short-lived declaration of martial law last December. Although the currency saw some temporary relief after Yoon's impeachment and arrest, it has yet to mount a substantial recovery, reflecting ongoing instability in South Korea’s political landscape. Meanwhile, equities are still struggling to recover from last year's losses. For context, Yoon declared martial law in early December of last year, accusing the main opposition party of engaging in "anti-state activities" and collaborating with "North Korean communists." This drastic decision followed months of Yoon's deep unpopularity, which some political commentators believe contributed to the opposition party's landslide victory in the parliamentary elections earlier that year. However, Yoon quickly rescinded the declaration just hours after it was made, following its overwhelming rejection by lawmakers and widespread public protests.

Graphs of the Week

More Commentaries

    • December total retail sales +0.4% (+3.9% y/y), w/ m/m rises in most categories.
    • Ex-auto sales +0.4% (+2.9% y/y); auto sales +0.7% (+8.4% y/y).
    • Rebounds in miscellaneous store sales (+4.3%) and sporting goods store sales (+2.6%).
    • Drops in building materials & garden equipt. store sales (-2.0%) and restaurant & drinking place sales (-0.3%).
    • Import prices advanced 0.1% m/m, the same monthly gain as in October and November.
    • Both imported fuel and nonfuel prices rose in December.
    • Export prices increased a larger-than-expected 0.3% in December. Gains were widespread across end-use categories.
    • Total beneficiaries decline in prior week.
    • Insured unemployment rate holds at 1.2%.
    • Rates in states range from 0.33% in Kentucky to 2.95% in Rhode Island.
    • The headline CPI increased 0.4% m/m. pushing the y/y rate up to 2.9%, the highest rate since July.
    • The core index rose 0.2%, pushing the y/y rate down to 3.2% after four months at 3.3%.
    • Energy prices were up markedly as the normal decline in gasoline prices was much less than the seasonal factors had anticipated.
    • Services prices less energy remained elevated although the y/y rate slowed to 4.4%, the lowest since February 2022.
    • Applications to purchase and to refinance loans jumped.
    • Rates on 30-year fixed-rate loans rose moderately.
    • Average loan size rose modestly in latest week.
  • Industrial output in the European Monetary Union continued to struggle. In November, it has advanced (for the headline series excluding construction) for the second month in row. However, a sharp drop in September leaves the three-month change in output falling at a 4.8% annual rate. Output still grows by 0.2% at an annual rate over six months but falls by 1.9% year-over-year. The output path is not draconianly weak, it is not even clearly weakening further, it is simply still challenged, fighting what appears to be still-stiff headwinds.

    Manufacturing sector trends- Manufacturing output results are nearly the same as for the headline. Manufacturing sectors show progressive weakening from 12-months, to 6-months, to 3-months for consumer goods output. Both consumer durables and nondurable goods output show sporadic weakens but it is only when they are combined that consumer goods output as a total makes the progressive nature of weakening apparent. Intermediate goods output declines on all horizons from 12-months to 6-months to 3-months, but it is not clearly trending. Capital goods output drops over 12 months and falls even more sharply over three months but manages to make a gain over six months preventing a clear statement about the trend being made.

    EMU PMI for MFG- The manufacturing PMI for the EMU is below 50 for each of the last two months and over three months, six months, and 12 months as well.

    QTD: Quarter-to-date- Quarter to date IP tracking shows declines in all sectors except capital goods output. Tracking output developments since COVID arrived from January 2020-to-date, output is higher only for overall consumer goods and that is driven only by the component consumer nondurable goods output. However, capital goods output is nearly unchanged on that horizon; the current level of capital goods output is lower than its January 2020 level by only 0.5%.

    Growth rankings- The ranking of year-on-year growth rates for November compared to all year-on-year growth rates since early-2007 shows no sector ranking higher than 38%. All rankings are below their median rates of growth over this period. The growth ranking for overall IP and for manufacturing are near their 25th percentiles marking them essentially lower quartile growth results.

    Country data The country data for 13 EMU members show four declines in November month-to-month following five with month-to-month declines in October and seven in September. The breadth of weakness on this measure has been diminishing. The country of declining output over 12 months, six months, and three months has been progressively falling as well -another good sign. And the median annualized growth rate has been rising over this span. However, quarter-to-date as of November, there are still seven countries showing output declines in progress with one at unchanged. Output is rising QTD in only five of thirteen EMU nations. However, in terms of growth rankings, there is relatively stronger growth only for the smallest countries in the EMU.

    Summing up Growth rankings are above the 50% median mark only for Finland, Greece, Belgium, and Malta. The big four economies Germany, France, Italy, and Spain, each have growth rankings below their respective historic medians with an average ranking of 26.5% - again near the lower quartile border. The EMU area is performing poorly with growth sputtering and weak growth still the order of business across sectors as well as across member nations.

    • Overall index rise softer than expected.
    • Advance in core goods prices is steady.
    • Advance in services price is steady.
    • December NFIB Small Business Optimism Index up 3.4 pts. to 105.1.
    • Uncertainty Index down 12 pts. to a six-month-low 86.
    • Expectations for economy up 16 pts. to 52%, the highest since March 2002.
    • Expected real sales up 8 pts. to 22%, the highest since January 2020.
    • Inflation (20%) remains top business problem, followed by Quality of Labor (19%); both unchanged from November.