Korea - becoming more interesting

The business sentiment survey for October shows confidence continuing to fall, particularly in manufacturing. It is likely by the end of this year that, for the first time in this cycle, the strength of activity starts to become a concern for policymakers.

October business sentiment

Led by manufacturing, business sentiment declined again in October. Overall confidence is still firmly in tightening territory for the BOK. But the decline has been quite sharp; the fall-in manufacturing sentiment has been particularly dramatic; and the diffusion across industries points to sentiment declining even further in the next few months.

Manufacturing prices in the survey ticked up in October, likely bolstered in part by the weakness in the KRW. But that seems unlikely to be sustained, given the fall-off in Chinese input prices (which usually lead those in Korea). Korea's terms of trade data released today also showed a lessening of import price inflation in August. All told, inflation momentum, which usually tracks prices in the business survey quite closely, has now overshot strongly to the upside, and is due for a pullback.

For the moment, it is easy for the BOK to remain hawkish and continue to hike. There is also a risk that inflation continues to boosted by consumption/services prices, and so remains resilient even as manufacturing/goods prices soften. But today's survey does suggest that activity will for the first time in this cycle soon start to become a worry for policymakers. That in turn means there is more room for debate about just what the BOK will be doing with policy in 2023.

For all the charts from today's survey, see here.