Korea – cutting on the agenda

The business sentiment survey is suggesting a deterioration in activity, and a fall in inflation. The survey hasn't yet fallen into cutting territory for the BOK, but likely will in Q123. That will become a more important message for the central bank if the labour market also starts to slacken.

December business sentiment

Activity is now slowing to a level where the BOK should no longer be hiking. That, at least, is the message of the December edition of the central bank's own business sentiment survey. That shows that overall sentiment is back to a little below the average of the last twenty years, reversing the post-pandemic surge.

The fall-back is evident for firms focused on the domestic market, but is particularly dramatic for exporters. Indeed, for companies selling overseas, sentiment has only been this low in the big downturns of the last few years – 2008, 2015, 2019, and the collapse that happened during the first onset of the pandemic. The diffusion across industries suggests sentiment will likely worsen further during the next few months.

The survey is now also pointing to an equally sharp fall in CPI momentum. The survey's measure of output prices has stabilised recently, but input prices continue to fall. Moreover, and again in common with the outlook for business sentiment, the leading indicators suggest there's more downside yet for input prices.

With exports contracting, and future price expectations in yesterday's consumer price survey also falling back, there are now plenty of indicators suggesting that the pace of BOK tightening should at least slow, and perhaps pause. The main area where there is less clarity in this overall picture is price developments in the services sector. The BOK business survey, which only asks manufacturing firms about prices, doesn't capture this.

This is a big short-coming because services inflation has shown real upwards momentum over the last couple of years. It is for this reason that it probably isn't right to be predicting the BOK cuts that would usually be the consequence of the sharp fall in business sentiment that is being seen. Still, why there isn't yet clarity, BOK loosening should be on the agenda for markets and will become more of a possibility if and when the labour market starts to slacken more.