Sales drop after tax cuts expire

After extended individual tax cuts on vehicles expired in June, the local economy immediately showed signs of weakening.

Domestic demand indicators, including consumption and facilities investment performed poorly in July, the government said Wednesday. Consumption fell 2.6 percent compared to the previous month and facilities investment, or investments in equipment and machinery, fell 11.6 percent during the same period.

“Domestic consumption in general dropped due to the end of extended individual tax cuts on vehicles,” said Yoon In-dae, a director at Ministry of Strategy and Finance.

In fact, the 2.6 percent decline in goods and services consumed is the biggest drop since September 2014, when it fell 3.7 percent month-on-month, according to Statistics Korea.

Furthermore, sales of durable goods like automobiles dropped significantly from the previous month. Sales in that category dropped 9.9 percent, while semidurable goods like clothes rose 0.6 percent and non-durable goods inched up 0.7 percent.

Facilities investment fell 11.6 percent compared to the previous month and 12.3 percent over a year ago. Investments in transportation facilities dropped 31.5 percent in July compared to the previous month due to corporate restructuring in Korea.

Industrial output, which showed some signs of recovery this year, struggled in July, largely due to the weak service industry, in which sales declined 0.7 percent compared to the previous month.

The Finance Ministry said production in the service sector dropped due to the fall in trading volume in local stock markets and in outdoor activities as the country experienced abnormally hot weather this summer.

Trading volume fell 8.9 percent in July compared to June, while the number of people engaging in outdoor activities, such as playing sports, dropped 6.2 percent during the same period, according to the Finance Ministry.

“The delay in passing the supplementary budget bills in the National Assembly and strikes planned by the automobile industry will have negative impacts later on,” said an official at the Finance Ministry. “Various uncertainties such as ongoing corporate restructuring and a possible U.S. Fed interest rate increase might take a toll on the local economy as well and the government will monitor these factors thoroughly to minimize the negative impacts coming from them.”

The Finance Ministry noted that strikes at major automakers, including Hyundai Motor, Kia Motors and General Motors Korea, will lower production in August by some 70,000 units.

Even though most of the sectors slowed, output in mining and manufacturing rose 1.4 percent month-on-month and 1.6 percent year-on-year.

“The sector performed better in July due to temporary factors such as the Olympics,” said Yoon at the Finance Ministry. In fact, the government said the production of LCD panels for televisions rose significantly, largely thanks to high demand from the Olympics.

Meanwhile, Korean companies maintain a negative business outlook as the country struggles with stagnant domestic consumption and an uncertain global economy.

The business survey index of manufacturing companies came in at 71 in August, down from 72 for July, according to the Bank of Korea on Wednesday.

A BSI reading above 100 means there are more companies that are optimistic about the economy, while a reading below the benchmark signals there are more pessimists than optimists.

The business outlook for September, however, rose 3 points compared to the previous month’s prediction of 71 to 74.

Shrinking domestic demand was cited as the most common reason for pessimism, accounting for 25.1 percent. That was followed by uncertain economic conditions at 18.4 percent. The third-most cited factor was weak exports, with volatile currency coming in fourth.

A separate index about the companies’ sentiment toward sales stood at 81 in August, down 2 points compared to the previous month.

The BSI for the non-manufacturing sector was 73 in August, up 3 points compared to the previous month.

The central bank surveyed 2,843 companies nationwide from Aug. 17 to 24. Of them, 1,747 were manufacturing firms, while the remaining were in other industrial sectors.

BY KIM YOUNG-NAM [kim.youngnam@joongang.co.kr]